Trade Gap Narrows for Second Straight Month

MBA (8/13/2008 ) Velz, Orawin
The trade deficit in goods and services narrowed to $56.8 billion in June from $59.2 billion in May. Both exports and imports of goods and services increased but exports, which posted the biggest gain since February 2004, grew faster than imports.
The trade deficit improved despite sharply rising import crude prices during the month. Petroleum imports increased to a record level as oil prices soared, registering the biggest monthly price gain on record.

The declining dollar has helped improve the deficit because it makes U.S. exports less expensive to foreign consumers, boosting U.S. exports. At the same time, the falling dollar makes U.S. imports more expensive to American consumers, discouraging U.S. imports. For a number of years, trade was a drag on economic growth.

Starting in the second quarter of 2007, trade turned into a boost to growth. During the second quarter, net exports contributed 2.4 percentage points to economic growth, its largest contribution since 1980, according to the advance estimate of gross domestic product released at the end of July. Real GDP grew by 1.9 percent (seasonally adjusted annualized rate) during the quarter and would have seen a 0.5 percent decline without the contribution from trade.

Adjusted for inflation, real exports increased while real imports dropped, narrowing the real trade deficit to $39.1 billion from $43.5 billion in May. June real trade deficit was much smaller than what the Bureau of Economic Analysis had assumed in the advance estimate of GDP. The contribution from trade to economic growth in the second quarter would likely be upward revised to about three percentage points from 2.4 percentage points reported earlier. Thus, it is likely that economic growth in the second quarter will be revised higher when the BEA releases the preliminary estimate of GDP on August 28. The third (and final) estimate for the second quarter growth will be released on September 26.