The US trade deficit widened sharply in July as businesses and consumers continued to buy more goods from overseas, pushing imports higher even as exports weakened. The increase adds to concerns that international trade could weigh on US economic growth in the third quarter.
The trade shortfall rose 24.4 percent from the previous month to US$88.6 billion, according to data released Thursday by the Commerce Department's Bureau of Economic Analysis and Census Bureau. Economists surveyed by Reuters had expected the deficit to reach US$90 billion.
The July figures followed government data released the previous week showing a sharp increase in the goods trade deficit. The latest report confirmed that imports were responsible for much of the deterioration, with companies purchasing large quantities of computers, semiconductors and other capital equipment.
AI Investment Drives Capital Goods Imports
Imports increased 2.8 percent to US$399.3 billion in July. Goods imports accounted for most of that increase, rising 3.7 percent to US$320.6 billion.
One of the biggest movements came from capital goods. Imports in that category climbed US$14.4 billion to a record US$140.3 billion.
The increase included substantial gains in computers, computer accessories and semiconductors. The figures point to continued investment in artificial intelligence infrastructure, as businesses expand computing capacity and purchase equipment needed to support AI development and deployment.
The surge also reflects a broader pattern in the US economy. Domestic demand remained strong during the second quarter, supported by household spending and a major wave of corporate investment tied to artificial intelligence. Much of that demand, however, has been met through foreign produced goods.
That dynamic can strengthen consumption and investment while simultaneously widening the trade gap. When imported goods rise faster than exports, net exports become a drag on overall economic growth.
Not every category of imports increased. Imports of industrial supplies and materials fell by US$1.8 billion in July. Crude oil imports accounted for the decline, dropping by US$1.8 billion as lower oil prices reduced the value of purchases from overseas.
Exports Fall as Industrial Shipments Decline
While imports increased, US exports moved in the opposite direction.
Exports fell 2.1 percent to US$310.7 billion in July. Goods exports dropped 3.0 percent to US$201 billion, with industrial supplies and materials accounting for much of the decline.
Shipments of industrial supplies and materials fell by US$8.7 billion, largely because of declines in crude oil and nonmonetary gold exports.
Nonmonetary gold is excluded from the calculation of gross domestic product, meaning movements in those shipments do not directly affect the GDP figures in the same way as other traded goods.
Several export categories did record gains. Capital goods exports increased by US$1.9 billion, while consumer goods exports rose US$1.7 billion. The increase in consumer goods exports was helped by higher shipments of pharmaceutical preparations.
The contrasting movements in imports and exports left the United States with a substantially larger goods trade deficit.
Goods Deficit Reaches US$119.6 Billion
The goods trade deficit expanded 17.3 percent to US$119.6 billion in July.
After adjusting for inflation, the goods trade deficit increased 12.7 percent to US$106.4 billion.
The figures matter for economic growth because net exports form part of the calculation used to measure GDP. A widening trade deficit generally subtracts from GDP when imports rise faster than exports, although the effect depends on what the imported goods are being used for.
The trade sector had already weighed heavily on economic growth during the April to June quarter. Trade subtracted 1.14 percentage points from GDP growth in the second quarter.
The US economy grew at an annualized rate of 1.5 percent in that quarter.
The July data suggest trade could again become a source of weakness in the third quarter if imports continue to rise faster than exports. At the same time, the composition of imports provides a more complicated picture because a significant portion of the increase came from capital equipment associated with business investment.
Services Trade Also Changes
The July report showed smaller movements in the services trade balance.
US imports of services declined US$600 million to US$78.7 billion. The reduction was driven mainly by lower charges for the use of intellectual property.
Transport services imports also declined during the month, while spending on travel services increased.
Services exports slipped US$400 million to US$109.7 billion. Lower exports of travel, financial and transport services outweighed increases in charges for the use of intellectual property and other business services.
The services surplus therefore remained an important offset to the much larger deficit in goods, but it was not enough to prevent the overall trade gap from widening.
The distinction between goods and services is increasingly important for the US economy. American companies remain major exporters of services, including financial services, business services and intellectual property. Goods trade, by contrast, continues to show a large structural deficit.
Tariffs Have Not Prevented Larger Deficits With Key Asian Partners
The July figures also offer an early indication of how US trade relationships are evolving despite the use of aggressive import tariffs.
The United States recorded record goods trade deficits with Mexico, Vietnam, Taiwan, Thailand, South Korea and Malaysia during the month.
That is significant because US trade policy has increasingly focused on reducing dependence on foreign manufacturing and encouraging companies to shift production closer to the American market.
Yet the July figures show that imports from several major trading partners remained strong enough to produce record bilateral goods deficits.
The pattern also reflects changes in global supply chains. Companies have been adjusting where they manufacture products, assemble components and source materials, but shifting production from one country to another does not necessarily reduce the total amount of goods entering the US.
Mexico, Vietnam and several Asian economies have become important manufacturing bases for companies seeking alternatives to production in China. Rising imports from those countries can therefore increase bilateral US trade deficits even when businesses are restructuring their supply chains.
Canada Trade Gap Narrows Amid Dispute
Trade with Canada moved in the opposite direction.
The US goods trade deficit with Canada narrowed by US$3.7 billion to US$3.2 billion in July.
The change comes as Washington and Ottawa remain locked in a trade dispute involving tariffs and countermeasures. Canada is one of the United States' largest trading partners, and cross border trade spans energy, automobiles, industrial materials, agricultural products and manufactured goods.
The reduction in the bilateral deficit does not mean trade tensions have disappeared. Instead, it reflects the monthly movement of imports and exports between the two economies, which can fluctuate significantly depending on commodity prices, production levels and the timing of shipments.
The United States also swung into a goods trade deficit with Switzerland during July.
Strong Demand Creates a Complicated Economic Picture
The latest trade figures present a mixed picture for the US economy.
On one side, the widening deficit means foreign trade could subtract from third quarter growth. Imports are rising rapidly, while exports are falling, creating a wider gap that weighs on the net export component of GDP.
On the other side, the composition of imports shows that American businesses are spending heavily on equipment. Record purchases of computers, semiconductors and related capital goods suggest companies are continuing to invest in technology and AI infrastructure.
That distinction matters. An economy importing large amounts of consumer goods because households are buying more overseas products presents a different picture from one importing large amounts of machinery and computing equipment for business investment.
The July data contain evidence of both strong demand and increased reliance on foreign suppliers.
For policymakers, the figures also raise questions about whether tariffs are producing the intended changes in US trade patterns. The continued growth of deficits with several countries targeted by US trade policy suggests that tariffs alone have not prevented businesses from sourcing substantial quantities of goods abroad.
The next trade reports will show whether July represented a temporary jump in imports or part of a broader trend. For now, the immediate numbers are clear: US imports climbed to US$399.3 billion, capital goods imports reached a record US$140.3 billion, exports fell to US$310.7 billion and the overall trade deficit widened to US$88.6 billion.
Those figures put trade on track to remain a significant factor in the US economic growth story as the third quarter progresses.