By Lucia Mutikani
WASHINGTON (Reuters) – The U.S. trade deficit jumped in May and trade tensions between the United States and China helped drive activity in the services sector to a two-year low in June, further signs that economic growth slowed sharply in the second quarter.
The economy’s dimming outlook was also underscored by other data on Wednesday showing private employers adding far fewer-than-expected jobs to their payrolls last month.
New orders for manufactured goods dropped in May for a second straight month.
The reports followed recent weak housing and business investment data, as well as moderate consumer spending. Business and consumer confidence have dipped.
The slowdown in activity as last year’s massive stimulus from tax cuts and more government spending fades could prompt the Federal Reserve to cut interest rates this month.
The U.S. central bank last month signaled it could ease monetary policy as early as its July 30-31 meeting, citing rising risks to the economy from the trade war between Washington and Beijing, and low inflation. The International Monetary Fund has lowered global growth estimates because of reduced trade flows as a result of the trade fights.
“One wonders how long Washington will continue to claim they are helping the U.S. economy,” said Chris Rupkey, chief economist at MUFG in New York. “One of the factors behind the economy’s fall in the Great Depression was protectionism and trade wars, and it will be a miracle if the world economy can avoid another downturn this time.”
The trade deficit rose 8.4% to $55.5 billion as a surge in imports overshadowed a broad increase in exports, the Commerce Department said. Economists polled by Reuters had forecast the trade gap widening to $54.0 billion in May.
The goods trade deficit with China, a focus of President Donald Trump’s “America First” agenda, increased 12.2% to $30.2 billion. Trump imposed additional import tariffs on Chinese goods, after a breakdown in negotiations, prompting Beijing to retaliate. Economists say the expectation of additional duties likely boosted imports from China, which jumped 12.8% in May.
Trump and Chinese President Xi Jinping last week agreed to a trade truce and a return to talks. White House trade adviser Peter Navarro said on Tuesday talks were heading in the right direction, but it would take time to get the right deal made.
The U.S.-China trade tensions have caused wild swings in the trade deficit, with exporters and importers trying to stay ahead of the tariff fight between the two economic giants. Trump on Wednesday accused China and Europe of “playing big currency manipulation game and pumping money into their system in order to compete with USA.”
“We still think it is slightly more likely than not that the trade dispute with China will ultimately escalate further,” said Andrew Hunter, a senior U.S. economist at Capital Economics in London. “Trade is likely to remain a modest drag on growth over the second half of this year, which we expect to compound a sharp slowdown in domestic demand growth.”
The dollar was little changed against a basket of currencies in thin U.S. trade ahead of Thursday’s Independence Day holiday. Stocks on Wall Street rose, with the S&P 500 <.SPX> index hitting a record high on expectations of a rate cut. U.S. Treasury prices also were higher.
In May, goods imports increased 4.0% to $217.0 billion. Apart from drawing more imports from China, the United States imported record amounts from the European Union, Mexico and Canada in May. The increase in imports was broad-based, with those of motor vehicle and parts soaring to an all-time high.
Petroleum imports rose and crude oil was more expensive, helping to inflate the import bill in May.
Goods exports increased 2.8% to $140.8 billion. Exports advanced across all sectors, including passenger aircraft despite Boeing
When adjusted for inflation, the goods trade deficit increased $4.8 billion to $87.0 billion in May, suggesting trade could be a drag on second-quarter gross domestic product.
Trade contributed 0.94 percentage point to the economy’s 3.1% annualized growth pace in the first quarter. The Atlanta Fed is forecasting gross domestic product rising at a 1.3% rate in the April-June quarter.
Anxiety over trade is spilling over from manufacturing to the services industries. In a third report on Wednesday, the Institute for Supply Management said its non-manufacturing activity index fell to 55.1 in June, the lowest reading since July 2017, from 56.9 in May.
A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity. The ISM said “a degree of uncertainty exists due to trade and tariffs.”
The decrease in services industry activity reflected a decline in the new orders measure, which dropped to the lowest level since December 2017. A gauge of services employment also fell.
“The slowing trend evident across categories raises concern that a slowing trend most evident in manufacturing is also becoming more apparent in the broader economy,” said Andrew Hollenhorst, an economist at Citigroup in New York. “This should leave the Fed right on the precipice of providing some ‘insurance’ by cutting rates at the July meeting.”
The slowdown in employment was mirrored by the ADP National Employment Report showing private payrolls increased by 102,000 jobs in June from 41,000 in May, but below market expectations for a gain of 140,000. That suggests a moderate rebound in the private payrolls component of the government’s closely followed employment report.
The June employment report will be released on Friday. Economists polled by Reuters are looking for nonfarm employment to have increased by 160,000 jobs after rising by only 75,000 in May. The unemployment rate is expected to have held near a 50-year low of 3.6% in June.
Still, layoffs remain low. A fifth report from the Labor Department showed initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 221,000 for the week ended June 29.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)