U.S. goods trade deficit narrows; inventories increase solidly

© Reuters. FILE PHOTO: Sea gulls sit on a lamppost beside shipping containers stacked at the Paul W. Conley Container Terminal in Boston, Massachusetts, U.S., May 9, 2018. REUTERS/Brian Snyder

By Lucia Mutikani

WASHINGTON (Reuters) -The U.S. trade deficit in goods narrowed in May as exports increased strongly, suggesting that trade could contribute to economic growth in the second quarter for the first time in nearly two years.

The report from the Commerce Department on Tuesday also showed solid increases in wholesale and retail inventories. While those gains, combined with a decline in goods imports, should provide a boost to gross domestic product growth this quarter, it also potentially signals slowing domestic demand.

The economy is on recession watch as the Federal Reserve aggressively tightens monetary police to tackle high inflation.

"Exports and inventories are still rising in May at least, and this means the recession clouds offshore will have to sit on the horizon for another month," said Christopher Rupkey, chief economist at FWDBONDS in New York.

The goods trade deficit fell 2.2% to $104.3 billion. A further narrowing is likely as spending shifts from goods to services and supply chain constraints ease.

Goods exports rose $2.0 billion to $176.6 billion. There were strong increases in exports of industrial supplies, motor vehicles, consumer goods and other goods. But food exports fell as did shipments of capital goods.

Imports of goods slipped $0.4 billion to $280.9. The decline was led by consumer goods imports, which fell 2.4%. There were also decreases in imports of food and capital goods. But imports of industrial supplies rose, likely reflecting crude oil imports, as did those of motor vehicles.

Slowing economic growth amid tighter monetary policy could weigh on imports in the months ahead.

A record trade deficit weighed on the economy in the first quarter, resulting in gross domestic product declining at a 1.5% annualized rate. Trade has subtracted from GDP for seven straight quarters. Growth estimates for the second quarter range from as low as a 0.3% rate to as high as a 2.9% pace.

"Supply-chain disruptions and very strong demand by U.S. consumers for goods contributed to the significant widening in the deficit over the past year," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

The Fed this month raised its policy rate by three-quarters of a percentage point, its biggest hike since 1994. The U.S. central bank has increased its benchmark overnight interest rate by 150 basis points since March.

The U.S. government also reported that wholesale inventories increased 2.0% in May after rising 2.3% in April. Stocks at retailers climbed 1.1% after advancing 0.7% in April.

Motor vehicle inventories rebounded 2.3% in May after declining 2.2% in the prior month. Excluding motor vehicles, retail inventories increased 0.8% after shooting up 1.7% in April. This component goes into the calculation of GDP growth.