WASHINGTON (Reuters) - The U.S. economy likely grew faster than initially reported in the second quarter, thanks to a sharp narrowing in the trade deficit to its lowest in more than 3-1/2 years in June as exports touched a record high and imports fell.
The Commerce Department said on Tuesday the trade gap fell 22.4 percent to $34.2 billion, the smallest since October 2009. The percentage decline was the largest since February 2009. The shortfall on the trade balance was $44.1 billion in May.
When adjusted for inflation, the gap narrowed 17 percent to $43.2 billion, the smallest since January 2010. The deficit in June was far smaller than the government had estimated in its advance gross domestic product report last week.
Economists, who had expected the trade gap to narrow only to $43.5 billion in June, said second-quarter GDP growth could be revised up to as high as an annual pace of 2.5 percent from the 1.7 percent rate initially estimated by the government.
"Today's surprise implies a significant upward revision to second-quarter GDP," said Laura Rosner, an economist at BNP Paribas in New York. "Our calculations suggest an implied revision of roughly plus 0.8 percentage point and our tracking estimate of second-quarter GDP growth is now 2.5 percent."
Economists had on Friday raised their growth estimates for the April-June period by a tenth of percentage point after data on factory orders showed a slightly higher pace of inventory accumulation in June than the government had assumed in its advance GDP growth estimate.
If economists' assumptions are correct, the faster pace of economic growth could bring the Federal Reserve closer to scaling back its massive monetary stimulus program.
Economists expect an announcement on the future of the Fed's monthly bond purchases in September.
Trade subtracted 0.8 percentage point from second-quarter GDP growth, according to the first government estimate.
The three-month moving average of the trade deficit, which irons out month-to-month volatility, fell to $39.5 billion in the three months to June from $40.5 billion in the prior period.
The dollar briefly trimmed losses against the euro and the yen on the trade report. Stocks on Wall Street were lower in thin volume as investors focused on corporate earnings, while Treasury debt prices were flat.
Belt-tightening in Washington and weaker global demand weighed on the U.S. economy in the first half of the year, but analysts expect activity to regain momentum for the rest of 2013 as the fiscal policy burden eases and growth in Europe picks up.
The trade report offered a fairly decent hand-off to third-quarter U.S. growth and suggested the drag on exports from sluggish overseas growth was starting to lift, which was recently highlighted in manufacturing surveys, economists said.
Exports of goods and services increased 2.2 percent to a record $191.2 billion. The gain in exports was broad-based, with food, industrial supplies, capital goods and consumer goods rising. Motor vehicle exports, however, fell in June.
Strong export growth helped to lift the economy out of the 2007-09 recession and signs of a pickup after faltering in recent months should buoy expectations of an acceleration in GDP growth in the last six months of this year.
"There are signs in this report of an easing of the weakness in activity abroad, which we think has been a headwind for U.S. manufacturing," said John Ryding, chief economist at RDQ Economics in New York.
"Though still below year-ago levels, exports to the EU are falling at a slower rate than earlier this year and exports to both Pacific Rim countries and South America picked up in June."
U.S. exports to the 27-nation European Union rose 1.5 percent in June. Exports to the EU in the first half of the year were down 5.5 percent compared to the same period in 2012.
Exports to China increased 4.5 percent in June. They were up 4.2 percent for the first six months of 2013. There was a jump in exports to Brazil and the United Kingdom.
In June, imports of goods and services fell 2.5 percent to $225.4 billion. The drop was almost across the board.
It reflected hefty declines in petroleum imports and industrial supplies and materials, which tumbled to levels last seen in November 2010.
The drop in petroleum imports shows the U.S. is making strides in reducing its dependence on foreign oil, a trend that economists said could help to curb the nation's trade deficit.
Some, however, were skeptical the trade deficit would remain lower and expected a bounce back in July.
"This level of improvement is unlikely to be sustained, and we expect the weak global economic backdrop and rising energy prices to result in a modest widening in the deficit in the coming months," said Millan Mulraine, senior economist at TD Securities in New York.
Reporting by Lucia Mutikani,; Editing by Andrea Ricci