The U.S. trade deficit narrowed in July to US$34.55 billion in July from US$36.75 billion in June.

U.S. exports rose 1.5% in the month on the back of stronger shipments of automobiles and aircraft. Imports fell 0.9% in July. “The decline was led by capital goods, which could flag renewed weakness in capital investment in the third quarter,” suggests Bank of Montreal. ‘Despite the improvement in trade balances in July, the U.S. posted record high deficits with Western Europe and China. The trade report highlights an upside risk to our current monitoring of 3% GDP growth in the third quarter.”

BMO Nesbitt Burns calls the fall in imports, “he emerging soft spot in the domestic recovery”, noting that this is the first decline this year. “Business-related imports tumbled in July as capital goods imports fell 1.1%, led by civilian aircraft. Technology imports suffered, and demand for consumer goods dropped for the first time since March. However, almost every category is up from year-ago levels, except for the aircraft component, as airlines continue to retrench,” says BMO Nesbitt.

BMO Nesbitt reports that, “the trade deficit with China widened by 17.6% year-to-date as imports are surging and almost surpassed imports from Mexico in July. The deficit with Canada has narrowed significantly this year, likely aided by the softwood lumber duties, with further shrinkage possible if Canadian domestic demand continues to roar.”

It concludes that the U.S. trade deficit is likely to widen in the months ahead. “However, the latest narrowing should help support Q3 GDP of 3.5%, or better.”

BMO adds that this report, coupled with the stronger-than-expected report on inflation, will, at the margin, weigh against the need for further Fed easing.