The U.S. goods trade deficit widened more than expected in July, reaching its highest level since March 2025.

The U.S. goods trade deficit widened sharply in July, primarily driven by a surge in capital goods imports, exceeding economists' expectations. Analysts believe this data will drag down third-quarter GDP, but it reflects strong demand from businesses for AI-related equipment rather than a weakening of economic fundamentals.

Data released by the U.S. Commerce Department on Thursday showed that the goods trade deficit widened by 17.2% in July from the previous month to $118.8 billion, the highest level since March 2025, exceeding the forecasts of all economists surveyed by Bloomberg. This data is unadjusted for inflation.

The widening trade deficit was primarily driven by imports. Merchandise imports rose 3.7% in July, with capital goods—including computers and accessories, semiconductors, and telecommunications equipment—recording their largest monthly increase since 1993. Meanwhile, U.S. merchandise exports declined by 2.9%, further widening the deficit.

In a research note, Nationwide Chief Economist Kathy Bostjancic noted, "While the larger-than-expected trade deficit will drag down third-quarter GDP growth, it reflects strong demand for AI products, not a weakening of the US economy."

Capital goods imports saw their largest increase in 30 years

The most striking feature of the July import data was the unusual performance of capital goods. This category, encompassing computers and accessories, semiconductors, and telecommunications equipment closely related to artificial intelligence infrastructure, saw its monthly increase reach its highest level since 1993.

This is closely related to the recent continuous investment by enterprises in the field of artificial intelligence. Data shows that against the backdrop of tariff policy changes and supply chain disruptions, US companies are proactively stockpiling related equipment and materials to hedge against risks, while the demand for imports of AI-related equipment remains healthy.

Imports of consumer goods rose only slightly in July, while imports of other categories declined, indicating that this round of import expansion has obvious structural characteristics, focusing on the capital and technology sectors rather than a comprehensive expansion of demand.

Imports and exports of industrial raw materials declined

In contrast to the previous month, imports and exports of industrial raw materials—including crude oil and petroleum products—both declined in July.

This category has previously fluctuated due to the rise in global demand for US petroleum products driven by the Iran war, while fluctuations in non-monetary gold imports and exports have also caused significant swings in this category multiple times over the past year.

The decline in both imports and exports of industrial raw materials in July indicates that the support of energy trade for the overall deficit has weakened, and the main contributor to the widening deficit this month has shifted to capital goods.

GDP projections face downward pressure.

These trade and inventory data will directly impact the government's preliminary estimate of third-quarter GDP, which is expected to be released in October.

Prior to the release of the latest merchandise trade report, the Atlanta Fed's GDPNow model had already predicted that net exports would drag down GDP growth by 0.14 percentage points. In contrast, net exports dragged down GDP by as much as 1.14 percentage points in the second quarter. The larger-than-expected widening of the trade deficit in July suggests that the trade-related pressure on GDP may increase in the third quarter.

Regarding retail inventory data, it increased by 0.7% in July, with wholesalers continuing to replenish their inventories. The continued accumulation of inventories makes a positive contribution to GDP accounting and can, to some extent, offset the drag effect of a widening trade deficit.

A more complete July trade report, covering the services trade balance and inflation-adjusted merchandise trade data, will be released on September 3.

Another set of data released on Thursday showed that initial jobless claims fell slightly to 203,000 last week, a historically low level. This data suggests that despite fluctuations in trade relations, the U.S. labor market remains robust.

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