Updated from 10:44 a.m. EDT
A fairly pronounced narrowing in the U.S. trade deficit last month should give the economy some extra juice in the third quarter.
Led by increased exports of automobiles, planes, railway equipment, and other industrial supplies, the trade gap narrowed 6% to $34.6 billion, the Commerce Department said. Economists had predicted a deficit of $37 billion. Exports rose 1.3%, to $83 billion, while imports fell 1%, to $119 billion, with the biggest drop in consumer goods.
Since the trade deficit is a major drag on the economy, any lift in it provides a boost to GDP. Brian Jones, an economist at Salomon Smith Barney, estimates the narrowing of the trade deficit will add three quarters of a percentage point to third-quarter growth. And others have raised their overall forecasts.
The report suggests more sales in the third quarter have been of domestic rather than imported goods. "We have seen a pickup in domestic production in the third quarter," said Christopher Low, an economist at First Tennessee Capital Markets. "Inventories are rising and the trade deficit is shrinking."
Low says GDP is on track for 5% growth in the third quarter, a result of strong consumption growth. "People are spending a lot of money on cars, houses, and home improvement," he said, while most other areas of the economy, including capital and government spending, are moribund. "The tendency is to say that business is so good in those three areas they are carrying a 5% growth rate."
Economists at Banc of America now expect GDP growth to be as high as 3.5% to 4% in the third quarter. "Strong consumer spending results, combined with improving trade numbers, suggest growth may rise above our current estimate of 3.2%," said Susan Polatz, an economist at Banc of America, in a note.
Behind the pickup in exports in July is the beneficial impact of a weaker dollar, economists said. Sneaker-giant
, for instance, reported a strong first quarter Wednesday, led by solid overseas results. Revenue in Europe rose 25%. But if you review Nike's European sales for year-over-year currency adjustments, they were up only 5%.
Still, the export gain may have to do with recently improving circumstances in foreign economies. "A lot of small, developing markets are doing a little better than expected," said Michael Swanson, an economist at Wells Fargo. "Demand, in general, is better following poor conditions last year."