US Trade Gap Widens 24% to $88.6B, Pressuring Q3 GDP Forecast

A 24.4% widening of the US trade deficit in July, to $88.6 billion and the largest since March 2025, reflects an AI-driven surge in technology imports that is set to weigh on third-quarter growth. Imports rose 2.8% to $399.3 billion while exports fell 2.1% to $310.7 billion, Commerce Department data showed Thursday.

The deterioration, flagged by last week's import-driven goods data, now feeds directly into growth forecasts. The Federal Reserve Bank of Atlanta's GDPNow model indicated net exports will subtract 1.34 percentage points from third-quarter GDP, the most since the start of 2025, according to the Atlanta Fed's tracking estimate. Economists polled by Reuters had expected the shortfall to reach $90.0 billion.

Capital goods imports jumped $14.4 billion to a record $140.3 billion — the largest monthly advance since 1993 — on strong gains in computers, computer accessories and semiconductors tied to the AI buildout. Computer accessories alone added $6.6 billion, the most on record. The merchandise deficit with Mexico widened to an all-time high, while the shortfall with Canada narrowed $3.7 billion to $3.2 billion as the two countries remain locked in a tariff dispute.

The trade drag compounds an already soft growth backdrop. Net exports subtracted 1.14 percentage points from second-quarter GDP, which expanded at a 1.5% annualized rate. With the July shortfall now larger than the GDPNow model had assumed, economists face further downward pressure on third-quarter estimates even as domestic demand — powered by consumer spending and business investment in artificial intelligence — stays firm.

AI Imports Outpace Weaker Oil and Gold Exports

The import surge was concentrated in capital goods, a category that excludes autos and captures the hardware underpinning data-center expansion. Goods imports rose 3.7% to $320.6 billion, while inbound shipments of semiconductors and telecommunications equipment also increased. Imports of industrial supplies and materials, including petroleum, fell $1.8 billion as crude prices declined.

On the export side, goods shipments dropped 3.0% to $201.0 billion, led by an $8.7 billion decline in industrial supplies — mostly crude oil and nonmonetary gold, which is excluded from GDP calculations. Capital goods exports rose $1.9 billion and consumer goods exports gained $1.7 billion, lifted by pharmaceutical preparations. Adjusted for inflation, the merchandise-trade deficit widened 12.7% to $106.4 billion, also the largest since March 2025.

Tariff Frictions and Geopolitics Cloud the Outlook

The deficit has fluctuated in recent months as the Iran war boosted global demand for US petroleum products while American firms sought to mitigate supply-chain disruptions. Despite aggressive tariffs, the US posted record goods deficits with Mexico, Vietnam, Taiwan, Thailand, South Korea and Malaysia, while the balance with Switzerland swung into deficit. The Trump administration levied 50% duties on billions of dollars of Canadian goods after trade talks collapsed last month, and Canada retaliated.

The last time net exports subtracted more than 1.3 percentage points from quarterly GDP was in the first quarter of 2025, when front-loaded tariff buying distorted trade flows. Whether the drag persists depends on whether the AI-driven import wave cools and whether oil demand holds. Separate data Thursday showed initial jobless claims were little changed, offering no fresh signal on the labor market ahead of the Fed's next meeting.

This article is for informational purposes only and does not constitute investment advice.