The US trade deficit was $42.9 billion in June, smaller than the expected $47.5 billion shortfall, and the gap in May was revised down slightly to $48.0 billion from $48.7 billion. The narrowing in the trade deficit in the month reflected a 0.9% increase in exports combined with a 1.5% decline in imports.
The increase in exports in June was broad based with only sales of food and feeds falling relative to May. The largest percentage increases were recorded in autos, consumer goods and other merchandise. Similarly, the decline in imports was broadly based although imports of vehicles and parts rose in the month. Imports of petroleum products dropped by 6.5% as the average price for a barrel of oil declined to $100.13 from $107.914 in May. The volume of petroleum imports however rose 1.8% relative to May.
Excluding the impact of prices, the real trade balance (in chained 2005 dollars, Census basis) narrowed to -$44.2 billion from a revised -$47.7 billion in May. This reflected 2.9% increase in the volume of exports combined with a 0.3% decline in imports. In the second quarter, the volume of exports rose at a 8.3% annualized rate while imports rose at a slower 3.1% pace.
Today’s reported narrowing in the real trade deficit gave a boost to the trade component's contribution to Q2 real GDP growth as the decline in the trade gap exceeded the assumptions made by the BEA in the advanced calculation. Today's data points to net exports contributing 0.5 percentage point to the quarterly rate compared to the 0.3ppt drag estimated earlier.
Both the volume of exports and imports increased in the quarter. In a separate report, initial claims for unemployment insurance fell by 6K to 361K in the latest week. The outlook for monetary policy is being guided by the developments in the labour market and we anticipate that the recovery in the pace of hiring in July will be followed by another solid increase in August. Today's claims report leads credence to this view.
To the extent that labour market conditions are set to gradually improve, the pressure on the Fed to provide additional stimulus should ease with only a small-sized program of MBS purchases likely to pass muster.
