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October 26, 2016 2:40 PM, EDT

Smaller US Trade Deficit Adds to Chances of Bigger GDP Rebound

Rich Clement/Bloomberg News

Tracking estimates of third-quarter U.S. growth are rising because of a shrinking merchandise trade deficit, though a drop in September imports shows a step back in underlying demand in the economy.

The goods-trade gap narrowed 5.2% to $56.1 billion in September, the smallest since March, based on Census Bureau data, while figures on wholesale and retail inventories showed increases, according to a preliminary report issued Oct. 26 by the Commerce Department.

Barclays Plc analysts boosted their tracking estimate of gross domestic product to 3% from 2.6%, while Stephen Stanley at Amherst Pierpont Securities raised his growth projection to 3.6% from 3.1%.

Even with the boosts to forecasts, the government’s first estimate of GDP on Oct. 28 may reflect a tempering of demand, given that imports of industrial supplies, capital goods and consumer merchandise all declined in September from the previous month. The data also show that an earlier surge in food exports, bolstered by sales of soybeans, was temporary and will “continue to unwind,” according to Citigroup Inc. analysts.

“It raises some questions concerning the underlying strength of consumer spending and the potential for a rebound in business equipment investment,” Citigroup’s Andrew Hollenhorst and Andrew Labelle said in a note. At Barclays, Rob Martin and Blerina Uruci said the latest figures “pose sizable downside risks to our near-term outlook for investment and consumer spending.”

Imports of merchandise fell 1.1% to $181.7 billion in September, while exports increased 0.9% to $125.6 billion, according to the Commerce data. Capital-goods imports dropped 3.6% and consumer goods from overseas were down 1.8%. The full trade report for September will be released Nov. 4.

JPMorgan Chase & Co. economists said there is now “additional upside risk” to its 3.3% growth estimate, after the economy expanded at a 1.4% annualized pace in the second quarter. Jim O’Sullivan at High Frequency Economics said in a note that the Oct. 26 data could add as much as a half percentage point to his projection of 2.5% growth.

With assistance from Michelle Jamrisko, Vince Golle and Shobhana Chandra.