Trade Gap Widens in July Due to Higher Oil Prices

The July trade deficit widened more than expected, after narrowing the past few months, to the largest monthly deficit in 16 months. Higher oil prices, which peaked close to $150 in July, are primarily responsible for the worsening deficit, which grew by $62.2B (consensus -$58B, prior revised up to -$58.8B from -$56.8B originally reported). Higher oil prices offset increased exports of autos, aircraft and machinery in July, as export growth rose by +3.3% MoM. Imports rose +3.9% MoM, but if oil is excluded, the deficit actually shrank last month to the lowest level since 2002. After adjusting for inflation, the trade deficit grew $1.1 B versus June. A shrinking trade deficit was a major boost to GDP growth last quarter. Excluding trade, the economy would have only grown +0.2% in the 2nd quarter. The recent rebound in the dollar as overseas economies weaken may limit further improvement in the trade deficit. The dollar has rebounded 13% since hitting a low in March. The trade gaps with OPEC, Europe, Asia, and Africa all widened in July versus June, with the deficit to OPEC leaping 34% to a new record high of over $24B on higher oil prices. Clearly, the recent sharp declines in energy prices over the past month will help reduce this OPEC oil deficit in August and September. Both goods and services exports rose in July on broad-based strength. Goods services rose +3.9% MoM (+24% YoY), lead by demand for capital goods (+2.2% MoM, +8.6% YoY) tied to computers (+6.9% MoM, +12% YoY) and aircraft (+5.7% MoM, -16% YoY). Consumer goods exports rose +5.3% MoM (+21% YoY) and autos rose +13% MoM (+12% YoY). Demand for services rose a more modest +1.8% MoM (+12% YoY). Imports of goods rose +4.3% MoM (+18% YoY) and services increased by +1.7% MoM (+8.4% YoY). Reflecting higher prices and volumes, crude oil imports rose +19% MoM (-110% YoY), and industrial supply imports grew by +9.6% MoM and +50% YoY. But in July, imported pharmaceuticals fell -16% MoM (+10% YoY) and apparel imports fell by -1.3% MoM (-5.3% YoY).