US May trade gap widens slightly to $41.84 billion

WASHINGTON, July 11 (Reuters) - The U.S. trade deficit remained near record levels in May at $41.84 billion, as U.S. exports struggled to show growth and record demand for foreign oil helped push imports slightly higher, the Commerce Department said on Friday.

The trade gap was the third highest on record and only slightly wider than the revised estimate of $41.65 billion for April. The May tally was in line with an average estimate of $41.50 billion made by analysts before the report.

U.S. hunger for imports seen eating into Q2 growth
Friday July 11, 3:19 pm ET
By Wayne Cole

NEW YORK, July 11 (Reuters) - Americans' hunger for foreign goods looks to have bitten a big chunk out of economic expansion last quarter and is forcing some analysts to cut already bare-bone forecasts for gross domestic product growth.

Figures on U.S. trade out Friday showed that in real terms, which is what matters for GDP, the country's deficit widened to $50.16 billion in May, its second highest level on record, from $48.38 billion in April.

Data for June are still to come but analysts say net exports look like cutting at least 1 percentage point and perhaps as much as 2 percentage points off GDP growth last quarter.

That would be a marked turnaround from the first quarter when they accounted for over half of the 1.4 percent annualized U.S. growth.

"Net exports now look likely to take 1.8 percentage points off Q2 GDP, even assuming a marginal improvement in June," said Dan Sloan, an analyst at 4Cast.

The poor trade performance follows unexpected weakness in n inventories and construction spending, reported in the last couple of weeks, and has dimmed the outlook for GDP.

"We have revised our Q2 GDP estimate down to 1.1 percent from 1.8 percent after the trade data, and also after inventory data in both the manufacturing and wholesale sectors showed declines with downward revisions to April," said Sloan.

That would be a disappointing turnaround from just a few weeks ago when upbeat numbers on real personal consumption had some analysts tipping growth of up to 3.0 percent.

ON THE OTHER HAND

"It's clear net exports will be a big drag on growth, taking at least a percentage point off and maybe one-and-a-half," said Jim O'Sullivan, an economist at UBS.

"But we see some compensations in that consumption is looking much stronger than first thought and we expect defense spending to register a big rise," he added. "For that reason, we're sticking with our forecast of 2.5 percent GDP growth."

He did note that the forecast could be rejigged depending on next week's indicators, which include June retail sales, housing starts and industrial production.

Joe LaVorgna, senior U.S. economist at Deutsche Bank Securities, also cautioned against assuming that a widening trade deficit automatically took away from domestic growth. "When you get a surprise on trade like this -- and imports are clearly well above expectations -- you have to adjust your assumptions about other parts of the economy," he said. In this case, he noted that imports of cars and capital goods had jumped, suggesting both consumption and business investment would turn out to be healthier than first thought.

"The impact of trade is never an arithmetic inevitability, so we're not going to cut our forecast of 2.6 percent GDP growth, at least not yet," LaVorgna said.

So if GDP is going to come in at 2.5, it's likely because of government spending on defense, and not an improving economy.

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