Trade Gap Shrinks to Five-Month Low as U.S. Imports Drop

Imports dropped in June by the most in a year as the U.S. economy moved closer to energy independence, helping the trade deficit unexpectedly narrow.

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 drop in purchases of foreign goods from the highest levels on record included declines in autos, cellular phones and the lowest petroleum imports in more than three years.

Demand for goods made overseas will probably rebound in coming months, helped by growing consumer spending and business investment. Exports, although the strongest on record, were little changed from the prior month, 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.

Stocks rose as a rally in energy shares overshadowed concern the Ukraine crisis will escalate. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,926.67 at 11:57 a.m. in New York.

Euro Area

Other data today showed rising tensions with Russia over Ukraine threatened the euro area’s recovery. Italy unexpectedly fell back into a recession in the second quarter and German factory orders dropped in June by the most since 2011.

The trade deficit in the U.S. was projected to widen to $44.8 billion, according to the median forecast of 66 economists surveyed by Bloomberg. Estimates ranged from $41 billion to $46.7 billion. The Commerce Department initially reported a $44.4 billion shortfall for May.

Imports decreased 1.2 percent, the biggest fall since June 2013, to $237.4 billion. April marked the highest point for U.S. purchases of goods made abroad in data going back to 1992, and May was the second-highest.

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

Horizontal drilling and hydraulic fracturing are unleashing record volumes of light oil from U.S. shale formations, helping raise domestic crude production to the highest level in more than a quarter-century. That’s brought the U.S. closer to energy independence than it has been in 29 years.

Excluding Petroleum

Excluding petroleum, the trade shortfall declined to $26.9 billion in June from $29.5 billion, according to today’s Commerce Department report.

“The domestic demand picture looks quite good, which bodes well for imports,” said Aneta Markowska, chief U.S. economist at Societe Generale in New York. “Business spending is moving ahead and consumer demand is growing at a moderate pace.”

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.

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 than currently estimated. Trade subtracted 0.61 percentage point from gross domestic product last quarter after taking away 1.66 points in the prior three months, according to a Commerce Department estimate last week.

Growth Rebounds

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 the July 30 report. Tracking estimates by economists at JPMorgan Chase & Co. in New York put the reading at 4.2 percent after today’s better-than-projected trade data.

While imports are likely to rebound in coming months, the outlook for exports is less certain. Tensions have flared recently in several parts of the world, which could slow demand for American-made goods. The standoff over Ukraine is escalating after the U.S. and the European Union hit Russia with additional sanctions. President Vladimir Putin has ordered economic retaliation and amassed soldiers on his country’s western border.

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.

Export Outlook

Kennametal Inc., a Latrobe, Pennsylvania-based maker of tools and tooling systems, is among companies counting on continued demand in world markets.

“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.”

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.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net Mark Rohner

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