WASHINGTON • The United States trade deficit jumped in May and trade tensions between the US and China helped drive activity in the service sector to a two-year low last month, 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 has 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 US central bank last month signalled that 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 US economy," said Mr 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."
One wonders how long Washington will continue to claim they are helping the US economy... 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.
MR CHRIS RUPKEY, chief economist at MUFG in New York.
The trade deficit rose 8.4 per cent to US$55.5 billion (S$75.2 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 US$54 billion in May.
The goods trade deficit with China, a focus of President Donald Trump's "America First" agenda, increased 12.2 per cent to US$30.2 billion.
Mr 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 per cent in May.
The US-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.
In May, goods imports increased 4 per cent to US$217 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 vehicles 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 per cent to US$140.8 billion. Exports advanced across all sectors, including passenger aircraft, despite Boeing in March suspending deliveries of its fastest-selling MAX 737 jetliner. The aircraft was grounded indefinitely following two deadly crashes in five months.
When adjusted for inflation, the goods trade deficit increased US$4.8 billion to US$87 billion in May, suggesting trade could be a drag on the second-quarter gross domestic product. Trade contributed 0.94 percentage point to the economy's 3.1 per cent annualised growth pace in the first quarter.
Anxiety over trade is spilling over from manufacturing to the service industries.
In a third report on Wednesday, the Institute for Supply Management said its non-manufacturing activity index fell to 55.1 last month, the lowest reading since July 2017, from 56.9 in May. A reading above 50 indicates expansion.
A gauge of service employment also fell.
"The slowing trend most evident in manufacturing is also becoming more apparent in the broader economy," said Mr Andrew Hollenhorst, an economist at Citigroup in New York.