The U.S. trade deficit in goods narrowed in June as imports declined across most major categories, but the improvement is unlikely to prevent international trade from weighing on economic growth for a second consecutive quarter, exposing the uneven impact of shifting trade flows, lower oil prices and cautious business activity.
Data released Tuesday by the Commerce Department’s Census Bureau showed the goods trade gap narrowed 4.2% to $101.5 billion in June from the previous month. While the deficit was smaller than in May, it came in slightly wider than economists’ expectations of $100 billion in a Reuters poll.
The narrowing reflected a broad-based decline in imports, although exports also weakened, falling to their lowest level in five months as lower crude oil prices reduced the value of petroleum shipments abroad.
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Economists quoted by Reuters said the latest figures suggest trade will again subtract from gross domestic product (GDP) growth in the April-to-June quarter, even as other parts of the economy continue to show resilience.
“Our model mapping the trade data onto the national accounts now points to net trade subtracting around one percentage point from second-quarter GDP growth,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.
The government is scheduled to publish its advance estimate of second-quarter GDP on Thursday. Economists surveyed by Reuters expect the U.S. economy to have expanded at an annualized pace of 2.1%, matching the growth rate recorded in the first quarter.
Imports Retreat After Earlier Surge
Goods imports fell $8.2 billion to $306.2 billion in June, although they remained 16.6% higher than a year earlier, highlighting that import demand remains historically strong despite the monthly decline. The slowdown likely indicates that businesses are scaling back purchases after months of front-loading imports to avoid potential supply disruptions and higher costs linked to the conflict in the Middle East.
Consumer goods imports led the decline, falling 3.8% during the month.
Imports of capital goods dropped 2.0%, though they remained 37.4% higher than a year ago, underlining sustained investment in equipment, including infrastructure supporting artificial intelligence and data center expansion.
Food imports declined 2.5%, automotive vehicle imports fell 2.5%, while industrial supplies imports slipped 1.9%, largely due to lower oil prices.
Although imports weakened in June, analysts caution that the decline could prove temporary.
Business investment remains robust, particularly in AI-related infrastructure, which depends heavily on imported semiconductors, servers and other advanced equipment. The Commerce Department reported Monday that orders and shipments of non-defense capital goods rose strongly in June, suggesting companies continue to expand productive capacity.
Exports Hit Five-Month Low
Exports of goods declined $3.8 billion to $204.7 billion, the lowest level since January. Industrial supplies exports dropped 4.4%, reflecting lower crude oil prices following a fragile ceasefire between the United States and Iran that eased concerns about global supply disruptions.
Food exports fell 3.1%, while capital goods shipments declined 1.1%.
Some sectors, however, remained resilient.
Automotive exports increased 5.1%, while consumer goods exports rose 3.2%, indicating continued overseas demand for U.S.-manufactured products outside the energy sector.
Despite June’s improvement, the average goods trade deficit during the second quarter remained wider than the average recorded in the first quarter, reinforcing expectations that net exports will again weigh on GDP.
Trade has now reduced U.S. economic growth for two consecutive quarters.
Financial markets reacted positively to the broader economic picture, with Wall Street stocks moving higher, the U.S. dollar weakening against major currencies and Treasury yields edging lower.
While trade remains a headwind, economists expect strong business investment and resilient household spending to cushion the broader economy.
Inventory levels also remain an important variable in the GDP calculation.
Wholesale inventories increased 0.3% in June, matching May’s gain. Retail inventories were unchanged overall after rising 0.5% the previous month, although inventories at motor vehicle and parts dealers increased 0.4%. Excluding automobiles, retail inventories fell 0.2%, a component closely watched because it feeds directly into GDP calculations.
The inventory data suggest businesses remain cautious about rebuilding stockpiles after drawing down inventories over the previous four quarters.
Consumer Confidence Slips As Households Remain Cautious
Separate data from the Conference Board showed U.S. consumer confidence weakened unexpectedly in July. The Conference Board’s Consumer Confidence Index fell to 90.8 from 92.2 in June, missing economists’ expectations for an increase to 92.3.
The decline was driven largely by continued concerns about the labor market, persistent inflation and the prolonged conflict in the Middle East, now entering its sixth month.
Confidence weakened among respondents identifying as Independents and Democrats, while Republicans remained relatively more optimistic.
“Consumers’ write-in responses on factors affecting the economy continued to be mostly pessimistic in July,” said Dana Peterson, chief economist at the Conference Board.
“Comments about food and grocery prices increased. Notably, references to jobs and unemployment picked up slightly.”
The share of consumers who described jobs as “plentiful” fell to its lowest level since February 2021, while fewer respondents also said jobs were “hard to get.”
The Conference Board’s labor market differential, calculated from perceptions of job availability, narrowed to 3.1 in July from 3.8 in June. The measure closely tracks changes in the national unemployment rate.
Christopher Rupkey, chief economist at FWDBONDS, said households remain weighed down by high living costs even though the economy continues to expand.
“Whatever hopes that the public had for change in Washington after the elections in November 2024 have now been replaced by the same old concerns about the future as a result of inflation’s higher prices and the ongoing affordability crisis,” he said.
“The latest reading does not herald a pullback or downturn in the economy, but economic growth is likely to remain moderate.”
Housing Affordability Remains Under Pressure
Additional data from the Federal Housing Finance Agency illustrated the continued strain on the housing market. Single-family home prices rose 2.2% year over year in May, following a 2.0% increase in April, extending the upward trend in home values.
At the same time, mortgage borrowing costs remain elevated.
The average interest rate on a 30-year fixed mortgage has climbed 60 basis points since the United States and Israel launched military operations against Iran in late February. According to Freddie Mac, the average rate reached 6.58% last week, the highest level in 11 months.
Higher borrowing costs combined with rising home prices continue to price many first-time buyers out of the market.
“Affordability and demand are still challenged,” said Michael Gapen, chief economist at Morgan Stanley.
“Housing activity is bouncing along the bottoms. Given we do not expect much more support to affordability through the price channel, we likely need lower rates to spark demand.”
Together, the latest economic data portray an economy that continues to expand at a moderate pace but faces persistent headwinds from weaker trade, elevated borrowing costs and cautious consumers. While strong business investment, particularly in AI-related infrastructure, remains a key source of support, economists say sustained growth will likely depend on an improvement in consumer confidence, easing financing conditions and a stabilization in global trade flows.