US trade balance improves in July as exports rebound and imports pull back

The U.S. trade deficit narrowed by more than expected to $41.86 billion in July, from a downwardly revised $45.21 billion in June (previously -$43.84 billion). Total exports of goods and services rose 0.4%. Gains were generally modest across categories with the exception of a significant 4.7% rise in automotive exports. Food & beverage exports rebounded 1.7% following a 4.0% drop in June. The only export category to decline in July was consumer goods, which fell 2.5%.

Imports fell 1.1%, led by a 5.3% decline in food & beverages and a 5.2% decline in consumer goods. Other categories performed better, with automotive imports up 1.1%, industrial supplies up 0.9%, and capital goods up 0.5%. Adjusted for price changes, the story was even better with real goods exports rising 0.9% and real goods imports falling 0.9%.

"We do not expect much from the trade sector in terms of contributing to economic growth, but July's numbers were surprisingly favourable", says TD Economics.

The improvement in the trade balance suggests the drag in the third quarter should be relatively modest, especially compared to the outsized decline in the first quarter of the year. Still, the dollar's rise looks set to continue, with further strength likely against both advanced and emerging economies. Weighting currencies by the share of U.S. exports, the dollar has risen a stunning 20% over the last year. Combined with subdued global growth, this creates a very challenging environment for exporters and explains much of the weakness reported in purchasing managers indexes.

It won't show up in real GDP directly, but the fall in oil and other imported commodity prices in August is likely to lead to a further improvement in the trade balance next month. This is a real income boost to American businesses and consumers and is reason to expect domestic spending to continue to drive growth forward even as the global economy struggles.