U.S. trade deficit narrows in July, ongoing strength of USD likely to keep lid on exports

The U.S. trade deficit narrowed in July from June’s deficit. It came in slightly better than the median consensus projection. The trade deficit came in at USD 39.5 billion in July, narrowing from June’s slightly upward revised USD 44.7 billion, and better than consensus forecast of USD 43.7 billion. A second straight month of rebound in nominal exports and a slight pullback in nominal imports mainly led to narrowing of the trade deficit in the month. Nominal exports rose 1.9 percent in sequential terms, driven by larger exports of goods, which grew 2.9 percent. Nominal imports dropped 0.8 percent, mainly due to weaker goods imports, which fell1 percent month-on-month.

Real goods exports increased 2.9 percent in sequential terms, thanks to a sharp increase in shipments of feeds, foods and beverages category. In the meantime, real goods import shrank 1.5 percent month-on-month, with declines in nearly all categories. Contraction of imports of capital and consumer goods mostly led to the fall in the import of real goods in July.

Since trade data is quite volatile, it is uncertain if July’s growth in exports indicates that the net trade would be less of a drag on the real GDP growth in the third quarter, as compared to the past six quarters, said TD Economics in a research report. However, the strength in exports of feeds, foods and beverages category seems to be in line with good agricultural harvest year for the U.S. farmers.

Even if subdued imports usually suggest less of a drag on quarterly GDP growth, the strengthening of the U.S. dollar since July would probably underpin firmer imports for the rest of 2016. Meanwhile, the lack of a rebound in automotive imports and capital goods in July might be seen as an indication of weak business investment.

“Ongoing dollar strength will likely keep a lid on U.S. exports, while making foreign goods and services cheaper, resulting in net-trade exerting at least a modest drag on GDP growth over the remainder of the year”, added TD Economics.