The U.S. trade deficit hit -$49.9 billion in June, which was much wider than market expectations for a -$42.3 billion shortfall.  May’s deficit was revised down slightly to -$42.0 from the initially reported -$42.3 billion.  The deterioration in the trade balance in the month reflected a solid $5.9 billion (3.0%) rise in imports with exports falling by -$2.0 billion (-1.3%).

The 3.0% increase in imports in June reflected solid gains in automotive vehicles and parts, capital goods and consumer goods. Imports of oil dipped in June on the back of lower prices. The fall in exports reflected lower sales of capital goods. Sales of automotive vehicles and parts, and aircraft were slightly higher. On a volumes basis, exports fell -1.6% while imports jumped by 4.8% resulting in the real goods deficit widening to -$54.1 billion in the month from -$46 billion in May.

The persistent widening in the real goods balance in the second quarter of 2010 resulted in net exports subtracting a whopping -2.8 percentage points of annualized GDP growth according to the BEA's (Bureau of Economic Analysis) advance report. Today’s trade data suggest an upward revision to the size of this drag. More complete data on other components of GDP output, like inventories, also point to weaker growth in the quarter. The data reports indicate that the U.S. economy limped through the second quarter after two quarters of healthy gains, and our monitoring suggests that real GDP will be downgraded to show that growth in the quarter was about -1% lower than the 2.4% increase in the advance report. Still, data show that domestic demand rose at a solid pace in the second quarter with today's report indicating that some of this demand was met via imports.

The overall weaker tone in recent months saw the Fed downgrade its assessment of the current state of the economy. It announce that it will be reinvesting the principal payments from agency debt and mortgage-backed securities (MBS) into longer-term U.S. Treasuries and will roll over its existing holdings of Treasury securities in order to support the economic recovery by keeping market interest rates low. Policymakers also left the door open for further steps to ease policy in its commitment to "employ its policy tools as necessary to promote economic recovery and price stability." Despite the recent weakening in momentum, we expect that the U.S. economy will emerge from this slow patch later this year and continue to build momentum in 2011.       

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.