Trade Gap Narrows Sharply as Imports Tumble--2nd Update

By Eric Morath 

WASHINGTON--The U.S. trade deficit narrowed more than expected in June amid a sharp decline in imports, a development that's likely to boost economic-growth readings but raises a concern about domestic demand.

The U.S. trade deficit shrank 7% to a seasonally adjusted $41.54 billion in June from May, the Commerce Department said Wednesday. That was the fastest contraction in the gap since last November. Imports fell 1.2% in June, the steepest decline in a year, while exports increased 0.1% to reach a record high.

The smaller gap than projected has many economists expecting the government to upgrade its measure of second-quarter gross domestic product later this month. The trade deficit has shrunk about 6% since March; a narrower trade deficit generally supports economic growth.

Forecasting firm Macroeconomic Advisers now projects GDP, the broadest measure of goods and services produced across the economy, expanded at 4.2% rate during the quarter. Other economists project as high as a 4.5% gain. Last week, the Commerce Department said GDP expanded at 4.0% annual pace from April through June.

The latest data also may support third-quarter growth. Imports, especially outside of oil, surged in April and May, but fell back in June.

"A further correction is likely over the next two months," said IHS Global Insight economist Patrick Newport. "As a result, imports will be a much smaller drag on growth than they were in the second quarter."

But the trend isn't entirely positive. It suggests importers may not be confident that U.S. consumers will ramp up spending heading into the second half. That runs counter to the Commerce Department's measure of consumer spending, which increased steadily during the second quarter.

The June decline in imports was led by decreased U.S. demand for consumer goods, automobiles and parts and foreign oil.

"The broad-based declines in import activity seem at odds with the narrative of improving domestic demand," said TD securities economist Millan Mulraine.

Growth in consumer spending eased in the first quarter and exports fell, contributing to the economy to contracting at a 2.1% rate. Those factors reversed in the second quarter, supporting the rebound in growth.

Exports rose sharply in May and held those gains in June. The small June improvement was led by increased foreign demand for U.S. cars, consumer goods and services, which includes travel and intellectual property use.

The numbers coincide with improved growth in China this spring and a stabilizing European economy. However, unrest in the Middle East, Africa and Ukraine could pose headwinds to global trade.

The U.S. trade ledger with Russia fell in June amid an escalating sanctions battle over the conflict in Ukraine. Exports plummeted 34% on the month to the lowest level since January last year. Imports from Russia fell nearly 10%. Russia, however, accounts for a relatively small share of total U.S. trade.

Trade with China, the No. 2 U.S. partner, has expanded modestly this year. The U.S. trade gap for goods with China widened 4.9% through June, compared with the same period a year earlier. That is only slightly larger than the 4% overall growth in the goods-trade deficit.

The goods deficit with European Union expanded 15.2% in the first half.

The gap with Canada, the largest U.S. trading partner, widened this year. But the gap with Mexico, Japan and Brazil narrowed during the first six months of 2014.

Ian Talley contributed to this article.

Write to Eric Morath at [e-mail] and Jonathan House at [e-mail]