U.S. goods trade deficit narrows; new home sales continue to decline.

The U.S. goods trade deficit narrowed in June for the first time this year amid a broad-based recovery in exports, but was probably insufficient to prevent trade from continuing to be a drag on economic growth in the second quarter.

The impact on gross domestic product (GDP) from the trade gap is likely to be offset by an increase in wholesale and retail inventories in June. The government is scheduled to release its preliminary estimate of second-quarter GDP growth on Thursday, which is expected to show a pickup in activity, thanks to an increase in consumer spending in June.

"The impact on second-quarter GDP growth from net trade is likely to be offset by inventories and investment," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

The goods trade gap contracted by 2.5% to $96.8 billion, the Commerce Department's Census Bureau reported Wednesday. The goods trade deficit had widened since January.

Goods exports increased by 2.5% to 1TP4Q172.3 billion, led by a 4.9% increase in food shipments. Capital goods exports increased by 3.6%. There was also a strong increase in exports of industrial supplies, which include crude oil.

Exports of motor vehicles and parts increased, as did exports of consumer and other goods. Exports have been hampered by slower global demand and a strong dollar as the Federal Reserve has kept interest rates high.

Imports of goods increased 0.7% to $269.2 billion. Imports of consumer goods increased by 3.3%, likely reflecting solid domestic demand. Capital goods imports advanced 2.6%, which bodes well for business spending on equipment.

Imports of other goods increased by 2.7%. But imports of industrial supplies, food and motor vehicles fell.

"Exports and imports of goods reversed their May declines in June," said Carl Weinberg, chief economist at High Frequency Economics. "However, second-quarter imports were higher than the first-quarter average, while exports were weaker."

Pantheon Macroeconomics estimated that trade subtracted as much as 1.4 percentage points from GDP growth last quarter, which would be the biggest drag in more than two years. Others, including Oxford Economics and Barclays, saw the contraction in the goods trade gap in June as an upside risk to their second-quarter GDP estimates.

Some of the imports in June likely ended up in wholesale and retail warehouses. The Census Bureau report also showed that wholesale inventories rose 0.2% in June after rising 0.6% in May. Retail inventories rose 0.7%, driven by a 1.8% increase in motor vehicle dealer inventories and parts. Retail inventories advanced 0.6% in May.

Excluding motor vehicles and parts, retail inventories gained 0.2% in June after falling 0.1% in May. This category enters into the GDP calculation.

Business inventories are estimated to have added approximately 1.5 percentage points to GDP growth last quarter after subtracting from growth for two consecutive quarters.

INVENTORY DRIVE

According to a survey of economists, GDP is likely to have increased at an annualized rate of 2.0% in the April-June quarter.

Both trade and inventory investment subtracted from GDP in the first quarter, with the economy growing at a 1.4% pace during that period.

Economists expect the trade gap to remain wide, with companies, faced with uncertainty of new tariffs on foreign goods, anticipating imports ahead of the November 5 presidential election.

"The outlook for imports remains strong," said Matthew Martin, U.S. economist at Oxford Economics. "Consumer demand is resilient, and companies are stocking up ahead of the peak shipping season to replenish depleted inventories, and perhaps in anticipation of higher tariffs after the election."

After providing a considerable boost to the economy in the January-March quarter, the fortunes of the housing market have declined amid persistently high mortgage rates and home prices.

A separate report from the Census Bureau on Wednesday showed that new home sales fell 0.6% to a seasonally adjusted annual rate of 617,000 units in June, the lowest level since November.

The second consecutive monthly decline extended the flow of weak housing data, including existing home sales, single-family starts and permits.

The housing market has been the sector most affected by the U.S. central bank's aggressive tightening of monetary policy.

It came out of its slump, with residential investment, which includes home construction and sales, achieving double-digit growth in the first quarter. Economists believe that residential investment probably contracted in the April-June quarter.

The Fed has kept its benchmark interest rate at the current range of 5.25%-5.50% over the past year. It has raised its policy rate by 525 basis points since 2022 in its effort to control high inflation.

The median price of a new home decreased 0.1% to $417,300 in June compared with a year earlier, as supply increased. The inventory of new homes increased in June to 476,000, the highest level since February 2008, from 472,000 units in May. At June's sales pace, it would take 9.3 months to clear the supply of homes on the market. That was the highest since October 2022 and up 9.1 months in May.

But with mortgage rates retreating from the highs set in the spring due to expectations of a rate cut in September, the outlook for the housing market is encouraging, at least for new construction.

"If, as we expect, this most recent downward trend in mortgage rates persists, then we believe new home sales may rebound in the second half of the year," said Thomas Ryan, North America economist at Capital Economics. "Although home listings are slowly increasing, the supply of pre-owned homes remains historically low."

Collaboration: Grupo Auge | Reuters (International).