The U.S. trade deficit in goods narrowed in May as imports declined, but the improvement was probably insufficient to prevent trade from being a drag on economic growth in the second quarter. However, this potential setback to gross domestic product (GDP) is expected to be counterbalanced by an increase in inventory investment. 

A recent report from the Commerce Department, released on Wednesday, revealed a robust growth in retail inventories last month, further supporting this notion. Despite concerns about a possible recession, a series of positive data, including nonfarm payrolls, retail sales, durable goods orders, and housing starts, indicate that the economy has remained on a steady growth trajectory in Q2.

The deficit in goods trade decreased by 6.1% to $91.1 billion in May, yet the majority of the surge witnessed in April still persists.

Abbey Omodunbi, a senior economist at PNC Financial said, “Despite the narrowing in May, the goods trade deficit has risen by more than 10% since March, and it is likely to impede economic growth in the second quarter.” 

Imports experienced a decline of 2.7% to reach $254.0 billion. While this reduction helped reduce the deficit, it suggests a softening of domestic demand. The decline was primarily driven by a significant drop of 7.3% in consumer goods imports. Imports of industrial supplies, including crude oil, fell by 5.9%. 

Food imports experienced a slip of 3.0%. However, there was a positive development in capital goods imports, which rose by 1.3%, indicating favourable conditions for business investment. Furthermore, imports of motor vehicles and parts increased by 0.9%.

Exports of goods witnessed a decline of 0.6% to $162.8 billion, largely due to a substantial drop of 14.2% in food shipments. Industrial supplies exports also experienced a decline of 3.0%. However, the nation observed a notable increase of 8.7% in exports of motor vehicles and parts. Consumer goods exports recorded a significant surge of 4.3%, while shipments of other goods increased by 2.4%.

During the first quarter, trade did not contribute to the annualised growth rate of 1.3% in the economy, following three consecutive quarters of positive impact on GDP.

The report also disclosed that retail inventories saw an increase of 0.8% last month, building on a gain of 0.3% in April. Motor vehicle inventories witnessed a substantial surge of 2.9% after a 1.6% advancement in the previous month. Retail inventories, excluding motor vehicles, remained unchanged after a 0.3% decrease in April. These inventory figures play a crucial role in calculating GDP. Wholesale inventories experienced a slight dip of 0.1% in May following a 0.3% drop in April.

Private inventory investment registered its slowest pace of growth in the last 1-1/2 years during the first quarter, deducting 2.10 percentage points from the overall GDP growth in that period.

The Atlanta Federal Reserve’s current estimate suggests that GDP for the second quarter will grow at a rate of 1.8%.