Improvement in Trade Deficit in July Gets Q3 Off to Good Start

One-off declines in two import categories were largely behind the narrowing in the trade deficit in July. Net exports likely will weigh somewhat on overall GDP growth in coming quarters.

One-Off Drops in Imports Drive Narrowing in Trade Deficit

The U.S. deficit in international trade in goods and services narrowed from an upwardly revised figure of $45.2 billion in June to $41.9 billion in July (top chart). The decline in the red ink in the nation’s trade account reflects the $809 million increase in exports of goods and services and the $2.5 billion drop in imports.

Outside of consumer goods, there was broad-based strength on the export side of the ledger. Specifically, exports of industrial supplies and materials rose $303 million, capital goods exports were up $179 million, and exports of cars and auto parts increased $596 million. That said, export growth generally has been weak over the past year or so (middle chart), which reflects slow economic growth in some of the country’s major trading partners as well as the effects of dollar appreciation. With the dollar not expected to fall significantly in value anytime soon and with growth in some major foreign economies likely to remain lackluster for the foreseeable future, marked acceleration in exports in the near term does not seem likely, July’s increase notwithstanding.

The decline in imports was concentrated in consumer goods, which plunged $2.6 billion. Notably, imports of pharmaceutical preparations tumbled $1.5 billion and imports of cell phones nosedived $1.3 billion. Given the previous strength that these two categories have exhibited this year—pharmaceutical preparations are up 17 percent year-to-date and imports of cell phone are 5.5 percent higher than they were in the first seven months of 2014—the declines that occurred in July appear to be oneoff events. The value of petroleum imports edged up by roughly $300 million in July. Given the sharp drop that occurred in oil prices in July and August, the value of petroleum imports will likely decline in coming months.

Inreal terms, exports of goods were up 0.9 percent while imports of goods fell by a similar percentage. After slicing 1.9 percentage points off of overall GDP growth in the first quarter, real net exports were essentially flat in the second quarter. The narrowing that occurred in the real trade deficit in July gets the third quarter off to a good start (bottom chart). Indeed, if the real trade deficit remains unchanged in August and September, then net exports will provide a small contribution to overall GDP growth in the third quarter. That said, we do not look for net exports to boost U.S GDP growth on an ongoing basis. As noted above, export growth generally should remain lackluster in coming quarters and solid growth in domestic demand should pull in imports at a decent clip. In sum, we expect that the external sector will weigh on overall U.S. real GDP growth in coming quarters.