What a Shrinking Trade Deficit Means for the U.S. Economy

Kiplinger’s latest forecast on the direction of the trade deficit

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The trade deficit fell again in July, to its lowest level since a year ago. The U.S. trade deficit in goods and services fell to a seasonally adjusted $70.7 billion in July, from $80.9 billion in June — a 12.6% drop. The trade gap has narrowed over the past four months, thanks to slowing domestic demand for imported goods, and will likely continue on this path in coming months.

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Exports rose for the sixth consecutive month in July. Total exports rose 0.2% due to stronger overseas demand for U.S.-made goods, with capital goods and automotive parts leading the monthly gain. Service exports rose on stronger inbound tourism and demand for transport. After a slow rebound from the slump in the early stages of the pandemic, real goods exports are now 7% above the prepandemic peak. On the imports side, the 2.9% decrease was broad-based, as food and beverage purchases dropped considerably, along with imports of industrial supplies and consumer goods. Services imports fell as domestic demand for both business services and travel declined. The United States has historically run a surplus in services, which has declined throughout the pandemic. A rebound in services activity should increase the surplus and contribute to the narrowing in the broader trade deficit.

Net exports should boost GDP growth in the third quarter. The improvement in the trade deficit over the past few months means that international trade will make a significant contribution to GDP growth in the third quarter.

Source: Department of Commerce, Trade Data

Rodrigo Sermeño
, The Kiplinger Letter

Rodrigo Sermeño covers the financial services, housing, small business, and cryptocurrency industries for The Kiplinger Letter. Before joining Kiplinger in 2014, he worked for several think tanks and non-profit organizations in Washington, D.C., including the New America Foundation, the Streit Council, and the Arca Foundation. Rodrigo graduated from George Mason University with a bachelor's degree in international affairs. He also holds a master's in public policy from George Mason University's Schar School of Policy and Government.