Smaller US Trade Gap Could Lift Second-Quarter Growth

MARTIN CRUTSINGER | AP Economics Writer

WASHINGTON (AP) – A sharp decline in the trade deficit with other nations suggests the U.S. economy grew this spring at a faster pace than previously estimated, helped by a record level of exports.

The Commerce Department said Tuesday that the U.S. trade gap fell more than 22 percent in June from May to $34.2 billion. That's lowest level since October 2009.

American companies shipped more aircraft engines, telecommunications equipment, heavy machinery and farm goods. As a result, exports rose 2.2 percent to an all-time high of $191.2 billion.

Imports declined 2.2 percent to $225.4 billion, in part because oil imports fell to the lowest level in more than two years.

Economists said the steep drop in the trade deficit will likely lead the government to revise its economic growth estimate for the April-June quarter.

"We could see a sizeable upward revision," said Jennifer Lee, senior economist at BMO Capital Markets.

Last week the government said the economy grew at a lackluster 1.7 percent annual rate in the second quarter, in part because trade cut nearly a full percentage point from growth.

But after seeing the June trade figures – which were not factored into last month's growth estimate – some economists said growth could be closer to a 2.5 percent annual rate. The government reports its second estimate of growth for the April-June quarter on Aug. 29.

A smaller trade deficit lifts economic growth because it means consumers and businesses are spending less on foreign goods than companies are taking in from overseas sales.

Many economists think overall growth has started to rebound in the July-September quarter. Some say growth could near a 3 percent annual rate. A key reason is that several export markets, including Europe, are seeing improvement.

For June, U.S. exports to the 27-nation European Union rose 1.5 percent. That helped shrink the deficit with the region to $7.1 billion.

The deficit with China fell 4.3 percent to $26.6 billion, while America's deficit with Japan rose 2.2 percent to $5.5 billion in June.

Gregory Daco, senior economist at IHS Global Insight, said he was still thinks trade will drag on the economy in the second half of the year. That's because he expects imports will increase at a faster pace than exports, reflecting the health of the U.S. consumer and weaker growth overseas.

"We still have relatively modest global growth which will constrain U.S. exports," Daco said.

Still, Joel Naroff, chief economist at Naroff Economic Advisors, said the rise in exports underscored the importance that manufacturing plays in the U.S. economy.

"A number of companies are doing whatever they can to bring back as much production as they can to the United States," Naroff said. "They are facing rising wages in countries such as China and other problems of doing business there."

U.S. factories are already starting to show more strength after slumping earlier this year, helped by increases in business spending and less drag from government cuts.

Activity at U.S. factories increased in July at the fastest pace in two years in July, according to the Institute for Supply Management's closely watched manufacturing index.

And U.S. factories added 6,000 jobs in July, the Labor Department said Friday. That was the first month of manufacturing job growth since February.

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