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FRI-DATA: TRADE DEFICIT NARROWS, INVENTORIES GROW, MIDWEST FACTORY ACTIVITY GOES TO THE RACES

Having survived Thursday's data onslaught, investors coasted to the end of a holiday-shortened week with two relatively minor, but illuminating, economic indicators.

The Commerce Department released its advance take on goods trade balance USGBAL=ECI and wholesale inventories USAWIN=ECI for April.

The gap between the value of goods imported into the United States and those exported narrowed by 3.4% to $82.4 billion last month.

In detail, exports increased by 4%, with consumer goods and capital goods seeing the biggest monthly increases, at 7.8% and 7.5%, respectively. Imports grew at a slower pace, rising 1.9%, with a 5.6% jump in capital goods leading the charge.

On Thursday, the Commerce Department released its second take on first-quarter GDP, which showed net trade subtracted 1.25 percentage points from the headline figure, trade's biggest GDP reduction in the quarter leading up to President Trump's market-rattling "liberation day" tariff proclamation.

"If real goods imports and exports are roughly unchanged over the next few months, then net trade will make a roughly neutral contribution to GDP growth in Q2," writes Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. "But a lot can change as we get more data for the rest of the quarter. We see a risk that imports rise significantly over the next few months, as companies capitalize on the cut to tariffs on many products following the Supreme Court’s February ruling and attempt to build precautionary inventories to protect themselves against supply chain disruptions linked to the war in the Middle East."

The value of goods stacked in the warehouses of U.S. wholesalers rose by 0.5% in April, marking a sharp deceleration from the prior month's 1.5% jump, which was largely attributable to an inventory build-up to ease the potential effects of the U.S.-Israeli war on Iran, should the conflict last longer than many hoped.

That inventory front-loading is also evident in Thursday's GDP release; private inventories added 1.19 pps to the headline.

"The notion that companies are engaging in a renewed cycle of inventory building received further support from today’s numbers," Allen adds.

Note: the data gaps in these graphics are due to last fall's partial government shutdown.

In a separate report, Midwest factory activity surged back into expansion territory this month.

MNI Indicators' Chicago purchasing managers' index (PMI) USCPMI=ECI jumped 13.5 points to print at 62.7, leapfrogging past the barely expansionary 50.5 reading economists expected. That was its highest reading since January 2022.

A PMI reading above 50 indicates activity expanded compared with the previous month.

New orders provided much of the muscle, along with production, order backlogs and supplier deliveries, all of which offset a slight weakening in the employment component.

On the other hand, the prices paid element -- an inflation predictor -- rose to its hottest level since May 2022.

On Monday, the Institute for Supply Management (ISM) is due to unveil its broader, nationwide PMI reading for May, which is seen picking up a little bit of steam, rising to 53.0 from 52.7 and enjoying a fifth straight month north of 50.

(Stephen Culp)

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