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The US trade deficit saw a significant contraction in June as businesses scaled back on purchases of foreign-made capital goods, resulting in imports falling to their lowest level in more than 1-1/2 years. This decline in imports could indicate a slowdown in business investment and overall domestic demand, potentially influenced by hefty interest rate hikes from the Federal Reserve.

Economists anticipate that dwindling imports reflect not only stalling domestic demand but also caution from importers in terms of inventory accumulation. They predict that the trade balance will remain a fairly neutral factor in the near term before boosting growth at the beginning of next year, as domestic demand falters more than growth abroad and continues to exert downward pressure on import growth.

According to the Commerce Department, the trade deficit contracted by 4.1% to .5 billion. This is a revision from the previous report of a trade gap of .0 billion in May, with economists initially forecasting a trade deficit of billion.

Imports of goods and services, which includes crude oil, declined by 1.0% to 3.0 billion, marking the lowest level since November 2021. Goods imports, specifically, dropped 1.2% to 3.3 billion, the lowest level since October 2021. The capital goods category saw a decrease of .3 billion, with imports of computers declining by .6 billion.

Furthermore, imports of industrial supplies and materials, including crude oil, fell by .2 billion to the lowest level since May 2021. Petroleum imports in June were also reported as the lowest in nearly two years. However, the nation saw an increase in imports of motor vehicles, engines, and parts, which rose by .3 billion, reaching a record high.

While imports dipped, exports also saw a slight decline of 0.1% to 7.5 billion. Goods exports slipped by 0.1% to 5.1 billion, with exports of industrial supplies and materials falling by {TRESC}.7 billion to the lowest level since September 2021. The decrease was primarily driven by declines in crude oil, fuel oil, and natural gas liquids, which outweighed increases in exports of nonmonetary gold and other chemicals. Petroleum exports were reported as the lowest since October 2021.

Consumer goods exports also fell by {TRESC}.4 billion, mainly due to a decline in pharmaceutical preparations. On the other hand, capital goods exports increased by {TRESC}.8 billion, propelled by shipments of industrial machinery and telecommunications equipment. Additionally, exports of civilian aircraft dropped by {TRESC}.8 billion, while services exports decreased by {TRESC}.2 billion to .3 billion.

Trade acted as a minor drag on gross domestic product (GDP) in the second quarter, following four consecutive quarters of contributing to growth. Both export and import volumes declined in the last quarter, with their shares of GDP being the lowest since the mid-2000s, excluding recessions, according to JPMorgan. The decline has been attributed to the reshoring of manufacturing.

Efforts by President Joe Biden’s administration to bring semiconductor manufacturing back to the United States have resulted in a significant increase in factory construction. The US economy grew at an annualized rate of 2.4% in the April-June quarter.

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