US goods trade deficit shrinks in likely boost to second-quarter GDP

• Goods trade deficit narrows 10.8% to $86.0 billion in June
• Imports decline 4.2%; exports slip 0.6%
• Retail inventories increase 0.3%; wholesale stocks up 0.2%
• Job openings decrease 275,000 to 7.437 million
• Consumer confidence up slightly; labor market views weaken

By Lucia Mutikani

WASHINGTON, July 29 (Reuters) - The U.S. trade deficit in goods narrowed to the lowest level in nearly two years in June as imports fell sharply, cementing economists' expectations that trade likely accounted for much of an anticipated rebound in economic growth in the second quarter.

While the unexpected contraction reported by the Commerce Department on Tuesday prompted economists to upgrade their gross domestic product estimates for last quarter, the steep decline in imports flagged slowing domestic demand against the backdrop of a softening labor market.

That was reinforced by other data showing a decrease in job openings and hiring in June as well as deterioration in consumers' perceptions of current employment availability. The reports dovetailed with the high number of people receiving unemployment checks.

Economists say trade policy uncertainty, especially as to where President Donald Trump's tariff levels will eventually settle, has created an environment that was not conducive for businesses to make long-term plans. Imports surged in the first quarter as businesses rushed to beat higher prices ahead of the duties, contributing to the first decline in GDP in three years.

The Trump administration has announced a number of trade deals which economists said could help to ease the uncertainty.

"The data suggest the second-quarter GDP report will have a solid headline, but weak details," said Bill Adams, chief economist at Comerica Bank. "The economy was on uneven, wobbly footing in the second quarter."

The goods trade gap narrowed 10.8% to $86.0 billion last month, the lowest level since September 2023, the Commerce Department's Census Bureau said. Economists polled by Reuters had forecast the goods trade deficit would rise to $98.20 billion. Imports of goods decreased $11.5 billion, or 4.2%, to $264.2 billion, the lowest level since March 2024. The decline was led by a 12.4% plunge in consumer goods imports.

Industrial supplies imports, which include crude oil and non-monetary gold, slumped 5.5%. Imports of foods, feeds and beverages fell 1.1%, while those of motor vehicles decreased 2.0%. But capital goods imports rose 0.6%.

Goods exports slipped $1.1 billion, or 0.6%, to $178.2 billion. They were held back by an 8.1% drop in exports of industrial supplies. But exports of capital goods shot up 4.7%, while shipments of foods, feeds and beverages increased 4.0%. Shipments of consumer goods advanced 1.5%.

The government is scheduled to publish its advance estimate of second-quarter GDP on Wednesday. A Reuters survey of economists, conducted prior to the release of the trade data, forecast that GDP rebounded at a 2.4% rate in the April-June period after contracting at a 0.5% pace in the first three months of this year.

But many economists, including those at Goldman Sachs and J.P. Morgan, raised their estimates sharply. The Atlanta Federal Reserve now expects GDP to have increased at a 2.9% rate, up from its previous 2.4% forecast.

Though a reversal is expected after trade sliced off a record 4.61 percentage points from GDP in the first quarter, some of the boost could be offset by low inventories, the result of the ebb in the flow of foreign merchandise.

Wholesale inventories increased 0.2% in June after declining by 0.3% in May, the Census Bureau report also showed. Stocks at retailers rose 0.3%, matching the gain in May, driven by a 0.9% increase in motor vehicle stocks.

Excluding motor vehicles, retail inventories were unchanged. This component goes into the GDP calculation.

U.S. stocks were trading lower. The dollar gained against a basket of currencies. U.S. Treasury yields slipped.

FED ON HOLD

Despite the anticipated sharp rebound in the headline GDP number, the economy appears to have shifted into lower gear, especially the labor market.

Procter & Gamble PG.N said on Tuesday it would raise prices on some products in the U.S. because of tariffs.

Economists expect the Federal Reserve will keep its benchmark interest rate in the 4.25%-4.50% range after the end of a two-day policy meeting on Wednesday, resisting pressure from Trump to lower borrowing costs. The Fed cut rates three times in 2024, with the last move coming in December.

A second report from the Labor Department's Bureau of Labor Statistics said job openings, a measure of labor demand, had dropped 275,000 to 7.437 million by the last day of June.

The decline was concentrated in the accommodation and food services industry, with 308,000 fewer vacancies. Healthcare and social assistance job openings decreased by 244,000. The job openings rate fell to 4.4% from 4.6% in May.

Hiring declined by 261,000 to 5.204 million. Accommodation and food services hiring was down 106,000, while quits in the industry rose by 18,000. Economists attributed the increased churn in the sector to the White House's immigration crackdown.

"More of these issues could arise over the coming months as legal work status for a number of recent immigrants could be revoked starting as soon as July data and through the fall," said Veronica Clark, an economist at Citigroup. "Some increased churn in leisure hospitality in the last few months may already reflect factors like premature exits ahead of changes."

Layoffs slipped 7,000 to 1.604 million last month amid a reluctance by employers to fire workers.

A Reuters survey of economists expects the government's closely watched employment report on Friday will likely show nonfarm payrolls increased by 110,000 jobs in July after rising by 147,000 in June. The unemployment rate is forecast to increase to 4.2% from 4.1% in June.

The dimming labor market picture was captured in a report from the Conference Board that showed the share of consumers viewing jobs as "hard" to get jumped to the highest level in nearly 4-1/2 years in July. Consumers also scaled back plans to buy motor vehicles and houses over the next six months.

"Tariff fears and a steady moderation in the labor market continue to leave consumers less confident in their job prospects, which could limit their capacity to keep spending," said Shannon Grein, an economist at Wells Fargo.

Graphic-JOLTS

Graphic-Consumer confidence present v future

Graphic-Goods trade balance