US merchandise trade deficit narrows in June, fuelling Q2 GDP optimism

The US goods trade deficit narrowed significantly in June to $86 billion, the lowest level in nearly two years, as imports fell sharply, reflecting subdued domestic demand and the lingering effects of trade policy uncertainty. The unexpected contraction, reported by the Commerce Department on July 29, is expected to provide a meaningful boost to second-quarter gross domestic product (GDP) figures, due for release on July 30. Economists had forecast the goods trade gap would widen to $98.2 billion, but instead it shrank by 10.8 per cent from May’s revised $96.4 billion level. Imports dropped $11.5 billion, or 4.2 per cent, to $264.2 billion, led by a steep 12.4 per cent plunge in consumer goods. Industrial supplies, including crude oil and non-monetary gold, also fell by 5.5 per cent.

Trade gap shrinks, but details signal caution

While the narrowing trade deficit is expected to add significantly to GDP after dragging growth down in Q1, the underlying data revealed some red flags. Imports of food, motor vehicles, and other categories all declined, with only capital goods registering a modest 0.6 per cent increase. Goods exports also dipped by 0.6 per cent to $178.2 billion, weighed down by an 8.1 per cent decline in industrial supplies exports, though offset slightly by gains in capital goods and consumer goods.

Economists at Goldman Sachs and JPMorgan have revised their Q2 GDP forecasts upward, with the Atlanta Fed now expecting a 2.9 per cent growth rate, up from its previous 2.4 per cent estimate. Wholesale and retail inventories, which also factor into GDP calculations, rose by 0.2 per cent and 0.3 per cent, respectively, in June. However, excluding motor vehicles, retail inventories were flat, a potential drag on the final output figure.

Labour market softens as job openings and hiring decline

Trade-related uncertainty has also seeped into the labour market. The Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) showed job openings fell by 275,000 in June to 7.437 million, with hiring dropping by 261,000 to 5.204 million. Accommodation and food services, a sector hard-hit by both tariffs and immigration policy shifts, saw job openings decline by 308,000 and hiring drop by 106,000.

The separation rate in that sector rose as concerns mount over immigration crackdowns affecting legal work status. “Some increased churn in leisure hospitality in the last few months may already reflect factors like premature exits ahead of changes,” Citigroup economist Veronica Clark told Reuters. Despite the slowdown in hiring, layoffs remained stable at 1.604 million, suggesting employers are still hesitant to let workers go after years of tight labour supply.

The Conference Board also reported that consumer perceptions of job availability worsened significantly in July, with the share of respondents viewing jobs as hard to get rising to the highest level in over four years. Consumer plans to purchase big-ticket items like vehicles and homes also declined.

Fed expected to hold rates as growth picture remains mixed

Despite a likely strong Q2 GDP headline, the broader economic outlook remains uncertain. The Federal Reserve is expected to hold interest rates steady at 4.25–4.50 per cent following its policy meeting on July 30, resisting political pressure to cut borrowing costs further. While smaller trade deficits are poised to boost GDP temporarily, ongoing volatility from tariffs, inventory challenges, and a weakening labour market suggests the recovery may not yet be on solid footing.