The U.S. goods trade deficit exploded 27.4% higher in May, hitting $105.8 billion — the widest shortfall in more than a year — as American businesses loaded up on semiconductors, computers, and telecom equipment to feed the AI data center boom. Exports, meanwhile, fell 5.4% across the board, from industrial supplies to consumer goods. The full goods-and-services report, due this morning, is expected to show a total deficit around $78.5 billion.
The import surge isn’t about consumer gluttony — it’s about capital investment. Capital goods imports are up nearly 42% year-over-year, driven by data center buildout and the AI arms race. That’s the good kind of deficit, the one that builds productive capacity rather than just filling Amazon boxes. Still, net exports were a drag on Q1 GDP, and the Atlanta Fed’s GDPNow tracker is already pointing to just 1.2% annualized growth for Q2.
Services sector holds the line
Monday’s ISM Services PMI came in at 54.0 for June, down slightly from 54.5 in May but still firmly in expansion territory. The real story was buried in the sub-indexes: the employment gauge jumped to 51.2 from 47.9, snapping a three-month contraction streak. It’s not a hiring boom — more like a “low hire, low fire” equilibrium — but it punctures the narrative that the services labor market was rolling over.
Prices paid by services businesses fell to 67.7 from 71.3, helped by the fragile Iran ceasefire pushing oil back to pre-war levels. But with AI investment driving up semiconductor and electronics prices, the underlying inflation picture remains sticky enough to keep the Fed on alert. The federal funds rate sits at 3.50%–3.75%, and most economists still expect hikes this year.
Market pulse
The Dow Industrials crossed 53,000 for the first time Monday, extending the blue-chip rally. But the S&P 500 and Nasdaq are under pressure this morning after an overnight tech selloff in Asia spilled into U.S. futures. Semiconductors are taking the brunt, giving back early-week gains. The divergence — industrials up, tech down — smells like a rotation rather than a rout, but it’s worth watching.
What to watch
Consumer inflation expectations for June drop at 11:00 a.m. from the New York Fed — the last read was 3.5%, and consensus is looking for a dip to 3.2%. A cooler print would give the doves something to work with. Then tomorrow, the FOMC minutes from June’s meeting land at 2:00 p.m., followed by wholesale inventories. The minutes will be picked apart for any hint that the “hikes still coming” language is softening. Thursday brings initial jobless claims, and the consumer credit report rounds out the week.
Bottom line: a widening trade deficit that’s being driven by capital investment rather than consumption is a strange kind of good news — but it’s still a GDP headwind. Combine that with an ISM employment recovery and easing (but still elevated) services prices, and you’ve got a data mix that gives both hawks and doves something to cite. The FOMC minutes tomorrow will show which camp had the louder microphone in June.