US trade deficit hits nearly 2-year low; tariffs exert pressure on service sector

Straits Times

4 days ago

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The US trade gap with China shrank by a third to $12 billion, its narrowest since 2004.
WASHINGTON - The US trade deficit narrowed in June on a sharp drop in consumer goods imports, and the trade gap with China shrank to its lowest in more than 21 years, the latest evidence of the imprint on global commerce President Donald Trump is making with sweeping tariffs on imported goods.
Mr Trump's tariffs are leaving their mark on the US economy beyond trade, as a measure of activity in the vast services sector hit stall-speed in July, with businesses saying the swarm of new import taxes is driving up costs and making business planning more difficult.
The overall trade gap narrowed 16.0 per cent in June to US$60.2 billion (S$78 billion), the Commerce Department's Bureau of Economic Analysis said on Aug 5.
Days after reporting that the goods trade deficit tumbled 10.8 per cent to its lowest since September 2023, the government said the full deficit including services also was its narrowest since then.
Exports of goods and services totalled US$277.3 billion, down from more than US$278 billion in May, while total imports were US$337.5 billion, down from US$350.3 billion.
Imports of consumer goods and industrial supplies and materials were both the lowest since the middle of the Covid-19 pandemic, while exports of capital goods hit a record high.
The diminished trade deficit contributed heavily to the rebound in US gross domestic product during the second quarter, reported last week, reversing a drag in the first quarter when imports had surged as consumers and businesses front-loaded purchases to beat the imposition of Mr Trump's tariffs.
The economy in the second quarter expanded at a 3.0 per cent annualised rate after contracting at a 0.5 per cent rate in the first three months of the year, but the headline figure masked underlying indications that activity was weakening.
Last week Mr Trump, ahead of a self-imposed deadline of Aug 1,
issued a barrage of notices informing scores of trading partners of higher import taxes set to be imposed on their goods exports to the US.
With tariff rates ranging from 10 per cent to 41 per cent on imports to the US set to kick in on Aug 7, the Budget Lab at Yale now estimates the average overall US tariff rate has shot up to 18.3 per cent, the highest since 1934, from between 2 per cent and 3 per cent before Mr Trump returned to the White House in January.
'Last week's trade announcement reduced policy uncertainty, but businesses hoping tariffs were just threats must now adjust to the reality they are here to stay,' Nationwide Financial Markets Economist Oren Klachkin said in a note. 'We think the negative impact of high tariff rates will outweigh any positives from lower policy uncertainty.'
China trade gap
A centrepiece of Aug 5's report was the latest steep drop in the US trade deficit with China, which tumbled by roughly a third to US$9.5 billion (S$12 billion) in June to its narrowest since February 2004. Over five consecutive months of declines, it has narrowed by US$22.2 billion - a 70 per cent reduction.
US and China trade negotiators met last week in Sweden in the latest round of engagement over the trade war that has intensified since Mr Trump's return. The US currently imposes a 30 per cent tariff on most Chinese imports, which have fueled a steep drop-off in inbound goods traffic from China. Imports from China dropped to US$18.9 billion, the lowest since 2009.
The trade negotiators have recommended that Mr Trump extend an Aug 12 deadline for the current tariff rate to expire and snap back to more than 100 per cent, where it had briefly been earlier this year after a round of tit-for-tat increases by both sides.
'We're
getting very close to a deal ,' Mr Trump said Aug 5 in an interview on CNBC. 'We're getting along with China very well.'
The deficit with China was not the only one to narrow. Amid a continuing impasse on trade talks with Canada and hefty tariffs imposed on autos, steel and aluminum, the trade gap with the United States' northern neighbour was the smallest in nearly five years at US$1.3 billion.
The trade deficit with Germany also slid, coming in at US$3.8 billion and the lowest in five years. But a pair of key Asian trading partners - Taiwan and Vietnam - both posted record surpluses.
Services sector softening
The tariff effects showed signs in July of spilling over into the domestic services sector, which accounts for roughly two-thirds of total US economic activity. Business activity unexpectedly flatlined in July with little change in orders and a further weakening in employment even as input costs climbed by the most in nearly three years, underscoring the ongoing drag on businesses from tariff policy uncertainty.
The Institute for Supply Management's nonmanufacturing purchasing managers index slipped to 50.1 in July from 50.8 in June. Economists polled by Reuters had forecast the services PMI would rise to 51.5. A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy.
The survey's measure of services employment fell to 46.4, the lowest level since March, from 47.2 in June. It has indicated contraction in four of the last five months, and the reading followed the release last week of the Labor Department's surprisingly soft US employment report.
Price pressures, meanwhile, continue to mount. The survey's prices paid index rose to 69.9, the highest level since October 2022, from 67.5 in June.
Inflation until now has largely remained moderate because businesses have been selling merchandise accumulated before import duties came into effect, but data last week showed prices in some categories of goods like home furnishings and recreational gear have begun rising briskly.
More benign inflation from the services sector has helped keep overall inflation in check, but the ISM data brings into question whether that trend will continue or further fan concerns about the emergence of stagflation.
Respondents to the ISM survey frequently mentioned tariffs as a drag. 'Trade uncertainty causing client reevaluation of feasibility for projects in certain sectors, resulting in some delays or cancellations,' a respondent from the construction sector said. REUTERS