U.S. monthly trade gap smallest since 1999

By Alister Bull

WASHINGTON (Reuters) - The U.S. trade gap narrowed unexpectedly to $26 billion in May, the smallest since November 1999, as exports rose and domestic demand for foreign goods slumped, government data on Friday showed.

The Commerce Department said exports increased 1.6 percent in May, while imports declined by 0.6 percent. Economists said the drop in imports signaled continued weakness in the recession-mired U.S. economy.

"The trade deficit report is another indicator that things are not improving as expected," said William Larkin, portfolio manager with Cabot Money Management in Boston. "There is growing pessimism about how quickly the U.S. will recover, which I think will be slower than people expect."

Still, the stronger-than-anticipated export performance could bolster the contribution of trade to economic activity in the second quarter.

"If the real trade deficit in June remains unchanged, real net exports would add about two percentage points to GDP growth in the second quarter, everything else equal," Jay Bryson, global economist at Wells Fargo Securities, said in a note to clients.

The U.S. economy plummeted at a 5.5 percent annual rate in the first three months of the year. Economists expect a much smaller decline in the second quarter, with growth resuming in the second half of the year.

Analysts polled by Reuters had expected the trade deficit to widen to $30.2 billion in May. The trade gap in April was revised to $28.8 billion.

May's import level was the lowest since July 2004 and May marked the tenth straight month in which imports had declined, underscoring the weakness in the U.S. economy.