U.S. trade deficit drops to $41.9 billion in July

WASHINGTON - The U.S. trade deficit fell in July to the lowest level in five months as exports posted a small gain while imports declined, reflecting a big drop in shipments of consumer goods such as cell phones.

The deficit narrowed to $41.9 billion in July, a 7.4 percent decline from a June imbalance of $45.2 billion, the Commerce Department reported Thursday. Exports were up a small 0.4 percent to $188.5 billion, helped by stronger sales of U.S.-made autos and machinery, while imports declined 1.1 percent to $230.4 billion.

So far this year, the deficit is running 3.6 percent above last year's level, reflecting weaker export sales. The concern is that U.S. growth will be hurt by further declines in exports, reflecting a stronger dollar and overseas weakness in nations such as China.

Sal Guatieri, senior economist at BMO Capital Markets, predicted that trade will be a drag on economic growth over the next year as the strong dollar cuts into exports and boosts demand for imports by making foreign goods cheaper for U.S. consumers.

A sharp slowdown in China has roiled financial markets in recent weeks as investors have grown concerned that weakness in the world's second largest economy could have a more adverse impact on global growth.

The International Monetary Fund said Wednesday that China's slowdown, volatile financial markets and falling raw materials prices could lead to "a much weaker outlook" for global growth. China's troubles have sent the prices of raw materials such as oil and copper down sharply, increasing the economic problems of Brazil, Russia and other commodity exporters.

The July trade report showed that America's deficit with China rose 0.4 percent in July to $31.6 billion, the highest level in nine months. So far this year, the U.S. deficit with China is running 8.5 percent higher than last year, and is on track to record another annual record. America's trade gap with China is the largest with any country.

Responding to its deepening economic troubles, China announced on Aug. 11 that it was devaluing its currency, a maneuver that will bolster its exports but will widen the deficit with other nations such as the United States.

U.S. Treasury Secretary Jacob Lew warned China on Wednesday against manipulating its currency to give its exporters an unfair advantage. "We are going to hold them accountable," he said in a CNBC interview.

Trade has been volatile this year. Labor disputes at West Coast ports in the first quarter delayed imports and the shipment of U.S. goods overseas. That lowered exports and pushed the deficit to $50.6 billion in March, a three-year high.

Trade subtracted nearly 2 percentage points from overall economic growth in the first quarter, when the economy, as measured by the gross domestic product, slowed to a growth rate of just 0.6 percent. A narrowing of the deficit in the April-June period left trade adding a modest 0.2 percentage point to growth in the second quarter, when the GDP rebounded to a gain of 3.7 percent.

For the rest of this year, economists believe trade will be a small drag as they expect American exports to weaken further.

For July, exports did manage a 0.4 percent rise but so far this year U.S. sales abroad are running 3.4 percent below the level of a year ago. Imports are down as well, dropping 2.2 percent, a decline that largely reflects the big fall in oil prices.

The July deficit with the European Union climbed to $15.2 billion, the highest on record, as U.S. exports to the EU fell by 5.3 percent.