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PNC Senior Economist Bill Adams: Trade Deficit is Falling as Forecast;

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U.S. consumers shifted spending to domestic services and away from imported goods in July

The trade deficit is falling, in line with PNC’s forecast: With the pandemic less of a constraint on behavior and spending in July, consumers spent less on imported goods and more on domestically produced services. This shows up in the trade deficit as lower imports of consumer goods, contributing to a smaller trade deficit.

At the same time, the rest of the world is catching up with the U.S. in the economy recovery, pushing U.S. exports higher. Many American trading partners provided less fiscal stimulus to their economies than the U.S., enacted stricter public health rules to contain the pandemic, and were a few months slower in rolling out vaccines. Those factors made American exports recover from the pandemic much, much slower than imports. But as foreign economies recover, demand for American exports is rising too; this is especially the case for U.S. capital goods exports, which are benefitting from robust demand and activity in the manufacturing sector.

The weakest link in foreign trade continues to be international trade in services. Restrictions on international travel are going to keep trade in tourism and education (international students) depressed until the pandemic is much better under control.

The spread of the Delta variant is a downside risk to the trade balance. If health fears make Americans shy away from restaurants, trips, and other spending on services, that will delay the normalization of the trade balance and slow the economic recovery. But each successive wave of the pandemic has had less of an effect on the economy, so the drag from Delta will likely be less severe than the winter slowdown.

The trade deficit in goods and services shrank to $70.1 billion dollars in July from a downwardly-revised $73.2 billion dollar deficit in June (reported as $75.7 billion in the prior release). The downward revision to the June trade deficit was mostly due to a $2.4 billion upward revision to exports of services in the month.

Exports increased $2.8 billion to $212.8 billion in July. Goods exports increased $2.7 billion, with capital goods exports up $1.0 billion, consumer goods exports up $0.8 billion (mostly gem diamonds, up $0.6 billion), and autos and parts exports up $0.6 billion. Exports of services edged up $0.1 billion, with small increases in business service and intellectual property charges offset by less travel (less spending by foreigners visitors to the U.S.).

Imports fell $0.4 billion to $282.9 billion dollars in July.  Consumer goods imports fell $2.1 billion, industrial supply and material imports fell $1.7 billion, and autos and parts imports rose $1.1 billion. Imports of services rose $2.4 billion, with travel up $1.0 billion (American tourists and business travelers spent more abroad), charges for IP up $0.9 billion partially reflecting the Summer Olympics, and transport imports up $0.4 billion partially reflecting higher shipping rates.

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The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.

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