US: Increase in Trade Gap Points to Even Slower Q2 GDP Growth

A sharp decline in exports caused the trade deficit to widen more than expected in June. The increase in the trade gap means that Q2 GDP growth likely will be revised even lower.

Largest Trade Deficit in Nearly Three Years in June

The U.S. deficit in trade in goods and services widened from $50.8 billion in May to $53.1 billion in June (top chart). Not only did the deficit widen by more than the market consensus forecast had anticipated, but it was also the most red ink in the nation’s trade accounts in almost three years. Although the value of imports of goods and services dropped by $1.9 billion in June, exports tanked by $4.1 billion.

Export Decline Drives Increase in Deficit

The drop in exports was concentrated in cyclically-sensitive areas. Exports of industrial supplies and materials, which reflect movements in industrial activity in the rest of the world, fell $2.2 billion in June. Lower oil prices reduced petroleum exports by $748 billion, but declines in categories such as chemicals, coal, and iron and steel products reflect slower growth in foreign industrial activity. Exports of capital goods were off $1.5 billion in June (middle chart). With business conditions slowing abroad, slower growth in U.S. exports should be expected. Indeed, recent economic data show that foreign economic growth has downshifted over the past few months. The decline in exports in June, on top of the $900 million drop that was registered in May, is consistent with the sign of slower foreign growth that we have already observed.

On the other side of the ledger, the decline in imports was concentrated almost entirely in petroleum products, which fell $1.7 billion in value. Between the peak in early May and late June, oil prices fell nearly $20/barrel (they have subsequently declined even further). Therefore, the marked drop in the value of petroleum imports in June is not surprising, and further declines seem likely in the next month or two. There were some modest declines in imports of capital goods, consumer goods and autos. However, non-oil imports had risen sharply for three consecutive months—they were up 4.4 percent between February and May—so some payback for the previous surge is not surprising.

Downward Revision to Q2 GDP Likely

When the Bureau of Economic Analysis (BEA) made its first estimate of second quarter GDP growth, it did not have the June trade data. Therefore, it estimated that the trade deficit in goods would decline by $700 million. In the event, the deficit in goods widened by $2.2 billion. The implication is that the wider-than-expected trade gap will, by itself, cause the BEA to reduce Q2 GDP growth, which was initially reported at a very disappointing 1.3 percent annual pace, by roughly 0.5 percentage points. There still are a few other data releases that could cause the downward revision to Q2 GDP growth to be not as extreme. That said, it certainly appears that the U.S. economy was close to stalling in the second quarter of this year.

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