By Lucia Mutikani

WASHINGTON, June 26 (Reuters) – The U.S. trade deficit in goods swelled to a 14-month high in May as businesses boosted imports, likely to avoid shortages and higher prices related to the Middle East conflict, suggesting ‌trade remained a drag on economic growth in the second quarter.

The sharp deterioration in the goods trade deficit reported ‌by the Commerce Department on Friday also reflected a decline in exports. Recent business surveys have shown front-loading of orders by firms. Sponsors of the surveys attributed ​the behavior to the U.S.-led war against Iran, which raised commodity prices, including for oil and fertilizers, and disrupted shipping in the Strait of Hormuz.

But after the United States and Iran last week signed a preliminary peace deal, shipments through the strait have picked up, driving oil prices sharply lower. Even if supply chains returned to normal, economists warned that the trade deficit would likely remain elevated because of an ‌artificial intelligence investment boom that is largely ⁠reliant on imports.

“The widening trade deficit is bad news for national income growth, and it suggests that net exports might drag down real GDP growth too,” said Carl Weinberg, chief economist at High Frequency Economics. “The ⁠AI boom had better generate a corresponding increase in services exports to offset the influx of equipment. If it doesn’t, then this AI bubble is a losing proposition for the economy.”

The goods trade gap increased 27.4% to $105.8 billion last month, the highest level since March 2025, the Commerce Department’s ​Census ​Bureau said. Economists polled by Reuters had forecast the deficit at $85.0 billion.

Imports ​of goods increased $10.9 billion, or 3.6% to $313.4 billion, also a ‌14-month high. They were driven by a 6.3% surge in imports of automotive vehicles. Imports of consumer goods soared 5.7%. Despite high inflation, mostly stemming from the Iran war, consumer spending has remained strong, thanks to large tax refunds this year and a stock market rally.

BROAD INCREASE IN IMPORTS

Imports of industrial supplies, which include petroleum, increased 4.8%. Capital goods imports rose 0.4%. They surged 41.9% on a year-on-year basis, reflecting the AI spending spree.

Imports of foods, feeds and beverages increased 4.3%, while those of other goods advanced 11.5%. Overall ‌imports have remained high despite tariffs imposed by the Trump administration.

Goods exports ​dropped $11.8 billion, or 5.4%, to $207.7 billion in May. They were weighed down by ​a 9.2% plunge in exports of consumer goods. Industrial supplies ​exports tumbled 7.0%, while those of capital goods dropped 5.0%. Exports of other goods decreased 6.8%. But ‌food, feed and beverage exports increased 3.9%. Automotive vehicle exports ​rose 0.5%.

“Imports are moving sharply higher ​and this will subtract from GDP growth this quarter,” said Christopher Rupkey, chief economist at FWDBONDS. “The import drag on domestic economic growth is back because factories here cannot make it here no matter how Washington economic officials try to spin ​it.”

Trade had been a drag on gross domestic ‌product for two straight quarters. Growth estimates for the second quarter were converging around a 2.5% annualized rate ​before the trade data.

The economy grew at a 2.1% annualized rate last quarter after expanding at a 0.5% pace ​in the October-December quarter.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)