Trade deficit unexpected drop

The trade deficit in the U.S. unexpectedly narrowed in June, reflecting the biggest drop in imports in a year as the economy moved closer to energy independence.

The gap shrank 7 percent to $41.5 billion, the smallest since January, from May’s $44.7 billion, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg survey of 66 economists called for a deficit of $44.8 billion. The drop in purchases of foreign goods included declines in autos and cellular phones, while petroleum imports were the lowest in more than three years.

Demand for goods made overseas will probably rebound in coming months, helped by growing household spending and business investment. Exports were little changed at a record, a sign markets overseas will represent less growth for American factories as Europe’s economy struggles to pick up and geopolitical tensions mount.

“Imports are going to bounce back because of the strength of the U.S. consumer,” said Jay Bryson, global economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The U.S. is doing better than most advanced countries.” While exports also may rise, “overall, trade won’t add a whole heck of a lot to economic growth,” he said.

Stock-index futures held earlier losses after the report. The contract on the Standard & Poor’s 500 Index maturing in September dropped 0.4 percent to 1,905 at 8:48 a.m. in New York as a buildup of Russian troops on the Ukrainian border intensified investor concern that the crisis will escalate.

Bloomberg survey estimates ranged from trade deficits of $41 billion to $46.7 billion. The Commerce Department initially reported a $44.4 billion shortfall for May.

 

Fewer Imports

Imports dropped 1.2 percent, the biggest decrease since June 2013, to $237.4 billion from $240.3 billion in the prior month. Purchases of autos and parts declined by $1.07 billion and demand for cellular phones fell by $1.12 billion from the prior month.

Imports of petroleum, at $27.4 billion, were the lowest since November 2010. The nation’s trade deficit on the fuel declined to $14.7 billion, the narrowest since May 2009.

Excluding petroleum, the trade shortfall declined to $26.9 billion in June from $29.5 billion.

Exports edged up by 0.1 percent to a record $195.9 billion. Sales of civilian aircraft, pharmaceuticals and chemicals were among the biggest gainers.

 

Price-Adjusted

After eliminating the influence of prices, which renders the numbers used to calculate gross domestic product, the trade deficit shrank to $48.8 billion from $52 billion.

The narrowing probably means trade subtracted less from second-quarter growth.

A prior estimate released as part of the GDP report last week showed the gap grew to $470.3 billion in April through June from $447.2 billion in the first three months of the year.

The figures also showed that the drag from trade diminished. The gap subtracted 0.61 percentage-point from economic growth last quarter, after taking away 1.66 points in the prior three months.

Purchases of foreign-made products may get a boost from improving demand from American households and factories. Gains in consumer spending and business investment helped the economy expand at a 4 percent annualized rate in the second quarter, following a slump in the prior three months, according to a Commerce Department report on July 30.

 

Foreign Demand

Kennametal Inc., a Latrobe, Pennsylvania-based maker of tools and tooling systems, is among companies counting on some improvement in markets in the rest of the world.

“The global environment reflects a gradual acceleration in economic activity,” Carlos Cardoso, chairman and chief executive officer of Kennametal, said on an earnings conference call on July 31. “Of course, the pace and scope of recovery has been tempered by persistent uncertainties in the geopolitical and financial climates.”

Tensions have flared recently in several parts of the world, which could slow demand for American-made goods. Ukraine’s armed forces are pushing ahead with their campaign against pro-Russian separatists. While Russia has repeatedly denied any involvement in the conflict, the U.S. and the European Union tightened sanctions on Russia last week.

Fighting has also displaced or killed thousands in the Gaza Strip, where Israel’s latest offensive has been the deadliest in the Hamas-run territory since Israeli settlers and soldiers left in 2005. In Iraq, Islamic militants are battling to seize two of the country’s largest dams as a breakaway al-Qaeda group seeks to consolidate control over the territory it took this year.

 

Mixed Signals

Recent data signal a mixed performance for growth outside the U.S. In the U.K., an index of services expanded in July to the highest level since November, while a similar measure in the euro area grew less than initially estimated.

China’s growth accelerated for the first time in three quarters after the government sped up spending and freed up more money for loans to counter a property slump.

The outlook for global growth is less rosy than it appeared earlier in the year, according to the International Monetary Fund, which trimmed its forecasts last month. The world economy will advance 3.4 percent in 2014, the IMF said, less than its 3.6 percent prediction in April while still stronger than last year’s 3.2 percent.

Growth in emerging markets is projected to be 4.6 percent this year, compared with an April forecast for 4.9 percent, the IMF said. It also reduced projections for the U.S., based on the first-quarter contraction.

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