US trade deficit widens in May; net trade likely to hamper growth in H2

In May, the US trade deficit widened to USD 41.1 billion from April’s deficit of USD 37.4 billion. The deficit was more than market projections’ USD 40 billion. May’s deficit shows a drop of USD 314 million in the value of exports of goods and services in conjunction with a rise of USD 3.4 billion in imports.

In spite of trade deficit widening in May, net trade is expected to be just a small drag in the second quarter. A significant strength in exports in April is expected to be sufficient to help export growth surpass import growth in the second quarter, noted TD Economics.

The US economic growth will continue to be weighed on by the global economy, even more so after the Brexit vote. As long as uncertainty continues to be high, safe haven flows to the US are expected to exert upward pressure on the dollar.

Net exports are expected to negatively contribute 0.7 percentage points from the real GDP growth in H2 2016, according to TD Economics. This is likely to be countered by persistent strength in consumer spending, underpinned by weak consumer price inflation and tightening of labor market. The US economy is expected to continue growing modestly.

Nominal exports of the country declined 0.2 percent month-on-month in May. Exports of both goods and services declined, falling 0.2 percent and 0.1 percent respectively. Meanwhile, imports rose 1.6 percent on sequential basis. Imports of goods rose 1.9 percent, whereas services imports remained almost flat, rising 0.02 percent.

Real goods exports, adjusted for inflation, dropped 1.5 percent, whereas real goods imports increased 1 percent. The decline in goods exports was broad based; however, the drop was not unexpected given solid expansion in April. Imports’ growth was majorly due to consumer goods. This was also not unexpected given the persistent strong domestic fundamentals.