The economy is chugging along on the strength of foreign demand, even as many Americans cut back on basic purchases outside of food and fuel.  That was the message in Tuesday’s report on the trade deficit, which unexpectedly narrowed in June despite record prices for oil and energy imports.  Demand for exports increased 4 percent  the biggest monthly gain in four and a half years  to the highest level ever. Foreign customers snapped up $164.4 billion in American-made automobiles, electronics, food and industrial supplies, among other products, the Commerce Department said.  The surge in exports was enough to narrow the trade deficit by 4.1 percent, to $56.8 billion, a much smaller figure than economists had expected.  But take away the foreign sales, and many American businesses would be struggling. Outside of oil, domestic demand is faltering as American consumers pull back on spending.  Consumer spending was negative in June, after adjusting for inflation, and Americans shied away from foreign-made clothing, appliances, computers and a number of other common consumer goods.  “If you look at apparel and TV and furniture and toys and games, they were all down, and down quite sharply,” said Nigel Gault, chief domestic economist at Global Insight, a research firm.  “The only reason imports didn’t plunge this month was because of pharmaceuticals,” Mr. Gault said, “which were way up but can be very volatile from one month to the next.”  Imports fell 1.9 percent in June after stripping out oil and pharmaceutical products, according to data from ING Bank. Food and beverage demand dipped 1.9 percent, clothing was down nearly 8 percent, and semiconductors dropped 6.1 percent.  The weakening purchasing power of the American consumer could eventually drag down growth around the world, in turn driving down foreign demand. And a slowdown in other countries could hurt American exports, now a strong point in a weak domestic economy.  “It’s very good news that exports have been doing so well,” Mr. Gault said. “We don’t want to imagine how bad things would be if they hadn’t been.”  Indeed, foreign demand has been holding up, but there are signs of economic weakness abroad. Last week, the European Central Bank warned of a slowdown in growth and suggested it would hold interest rates steady to help fight inflation.  The dollar has also started to strengthen slightly, which could hurt export sales, although that trend was not reflected in the June trade report.  Oil prices have been falling since July, a favorable trend for American businesses, although that could hurt import sales and widen the trade deficit.  For now, the narrower trade deficit will probably nudge up the American gross domestic product for the second quarter of 2008, which was originally estimated at 1.9 percent.  A higher G.D.P. figure suggests more activity at American businesses.  The housing slump shows few signs of improvement and banks are continuing to struggle with a tight credit market. On Monday, the Federal Reserve reported that American banks tightened their lending standards in the last few months, a discouraging sign for businesses and households, particularly Americans who are seeking mortgages.  In June, the biggest export increases came in semiconductors, up 6.2 percent, and food and beverage products, which increased 8.8 percent.  Imports rose for civilian aircraft, up about 20 percent for the month, and pharmaceutical sales, up 26.6 percent. Over all, imports advanced 1.8 percent to $221.2 billion.  The trade deficit with China widened to $21.4 billion, from $21.1 billion in May.
A surge in exports helped the trade deficit narrow in June, an encouraging sign for domestic businesses that have become increasingly dependent on foreign customers.