Declining Imports Compress US Trade Deficit in June

The U.S. trade deficit narrowed sharply in June as businesses cut back on purchases of foreign-made capital goods, resulting in imports falling to the lowest level in more than 1-1/2 years.

The decline in imports reported by the Commerce Department on Tuesday potentially signals a slowdown in business investment and overall domestic demand amid hefty interest rate hikes from the Federal Reserve. Imports are falling as businesses carefully manage inventory in anticipation of softer demand. That was underscored by other data showing a bigger decline in wholesale inventories in June than initially estimated.

"Weakening consumer demand for goods and retreating inventory growth by businesses have softened imports this year, while exports continue to trend downward as the global economic backdrop softens," said Matthew Martin, a U.S. economist at Oxford Economics. "We expect depressed trade flows through the remainder of the year."

The trade deficit contracted 4.1% to $65.5 billion. Data for May was revised to show the trade gap narrowing to $68.3 billion instead of $69.0 billion as previously reported

Economists polled by Reuters had forecast the trade deficit shrinking to $65 billion. The nation's goods trade deficit with China fell $2.1 billion to $22.8 billion, with imports tumbling $2.3 billion. That trend could continue as China reported on Tuesday a 14.5% plunge in exports on a year-on-year basis.

Despite the narrowing in June, the U.S. trade deficit average in the second quarter was higher than in the first three months of the year.

Economists were divided on whether this suggested that trade was a bigger drag on gross domestic product than the government assumed when it published its advance estimate for second-quarter GDP last month.

The government estimated that trade was a small drag GDP last quarter after contributing to growth for four straight quarters. It estimated that the economy grew at a 2.4% annualized rate in the April-June quarter. The government will publish its revision to the GDP estimate later this month.

"The second quarter's solid increase in real GDP might be revised lower in the next estimate," said Bill Adams, chief economist at Comerica Bank in Dallas. "But the most timely and forward-looking economic indicators suggest the risk of a recession in the near future is receding."

Economists at Goldman Sachs left their second-quarter GDP tracking estimate unchanged after the trade data.

U.S. stocks were trading lower after Moody's cut credit ratings on several small- to mid-sized U.S. banks. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

Wholesale Inventories Decline

Imports of goods and services declined 1.0% to $313.0 billion, the lowest level since November 2021. Goods imports tumbled 1.2% to $253.3 billion, a level last seen in October 2021. Capital goods dropped $2.3 billion, with imports of computers decreasing $1.6 billion.

Imports of industrial supplies and materials, which include crude oil, fell $2.2 billion to the lowest level since May 2021. June petroleum imports were the lowest in nearly two years. But the nation boosted imports of motor vehicles, engines and parts, which increased $1.3 billion to a record high.

Consumer goods imports edged up $0.4 billion as an increase in pharmaceutical preparations was partially offset by a decline in artwork and other collectibles. Imports of services decreased $0.2 billion to $59.7 billion.

Exports dipped 0.1% to $247.5 billion, a 15-month low. Goods exports also slipped 0.1% to $165.1 billion.

Exports of industrial supplies and materials declined $0.7 billion to the lowest level since September 2021. Decreases in crude oil, fuel oil and natural gas liquids more than offset increases in exports of nonmonetary gold and other chemicals. Petroleum exports were the lowest since October 2021

Consumer goods exports fell $0.4 billion, led by a decline in pharmaceutical preparations. Capital goods increased $0.8 billion, lifted by shipments of industrial machinery and telecommunications equipment.

Exports of civilian aircraft dropped $0.8 billion. Services exports decreased $0.2 billion to $82.3 billion.

When adjusted for inflation, the goods trade deficit decreased 3.0% to $86.2 billion in June. Both export and import volumes declined last quarter and their shares of GDP were the lowest since the mid-2000s, outside of recessions, according to JPMorgan, attributed to reshoring of manufacturing.

Efforts by President Joe Biden's administration to bring semiconductor manufacturing back to the United States have seen a boom in factory construction.

A separate report from the Commerce Department on Tuesday showed wholesale inventories dropped 0.5% in June instead of falling 0.3% as previously reported last month. Stocks at wholesalers declined 0.4% in May.

Inventories are a key part of gross domestic product. Excluding autos, wholesale inventories fell 0.7% June. This component goes into the calculation of GDP.

Economists believe private inventory investment probably subtracted from growth last quarter, instead of making a small contribution as estimated last month.

"All else equal, a weaker inventory change in the second quarter would be a positive development with respect to third-quarter GDP growth," said Daniel Silver, an economist at JPMorgan in New York. "But it is very early to have a clear sense of what inventories will do in the third quarter."

Reporting by: Lucia Mutikani; Editing by William Maclean and Andrea Ricci; for Reuters.