A sharp narrowing of the goods trade deficit in June will most likely provide a boost to second-quarter gross domestic product, but the headline number masks underlying economic fragility.
Labor market activity slowed notably during the month, and signs of weakening consumer demand suggest more turbulence ahead, even as confidence ticks up on the surface. Among the highlights in Tuesday’s economic data:
- The goods trade deficit narrowed sharply to $86 billion in June from $96.4 billion earlier.
- Consumer goods imports fell by 12.4% in June—the third consecutive monthly decline.
- Job openings dropped to 7.4 million from 7.7 million.
- The consumer confidence index, as measured by the Conference Board, rose to 97.2 from 95.2 in July, driven by future expectations.
- Spending plans fell in July according to the Conference Board’s survey, foreshadowing softer consumption ahead.
The goods trade deficit posted a significant upside surprise in June as trade activity slowed amid tariff uncertainty.
We expect the trade component of GDP in the second quarter to show a strong positive contribution, driven by the sharp rebound in the goods trade balance.
While that will most likely add to GDP growth for the quarter, there are signs that falling trade activity will cause weaknesses elsewhere.
Because of the volatility of the trade component, markets will focus more on other GDP measures released this week, such as final sales and final sales to domestic purchasers.
With consumer goods imports dropping for the third month in a row—down by 12.4% in June—we will most likely see a sizable slowdown in consumption in the second quarter and beyond.
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If some of the improvements in the trade deficit also contribute to stronger inventory growth, as is often the case, we could see an upside surprise in second-quarter GDP. Still, a more significant drag is likely coming in the next quarter.
June was also a particularly slow month for labor market activity, with openings, hirings and layoffs all declining. With uncertainty remaining elevated, businesses have had to delay both hiring and layoff plans.
We believe the July deadline for the 90-day reciprocal tariff pause was one of the key reasons for the lack of labor market activity in June. As some tariffs are delayed further and more trade deals come into play, we may see a modest rebound in the coming months.
On the consumer front, confidence rose in July, according to the Conference Board, driven largely by an uptick in future expectations.
But that optimism may be short-lived: Spending plans actually fell, foreshadowing a tougher road ahead for consumption. Rising prices are also expected to add downward pressure on spending growth. Since labor demand typically lags changes in consumer demand, we anticipate more slowing in the labor market as the year progresses.
