The July petroleum deficit reached the lowest level since July 2009. Here, a Phillips 66 refinery in Los Angeles. AP
WASHINGTON—The U.S. trade gap narrowed in July, reflecting stronger demand for American goods abroad that could boost the factory sector in coming months.
The trade deficit shrank 0.6% to $40.5 billion in July from June as both exports and imports rose, the Commerce Department said Thursday. Exports climbed 0.9% while imports increased 0.7%. Economists surveyed by The Wall Street Journal had forecast a July trade deficit of $42.5 billion.
The report showed growing global demand for American goods such as autos and industrial supplies, a development that could ease concerns of woes in Europe and Asia weighing on the U.S. economy. Economists indicated they may boost their expectations for third-quarter growth based on the report, which combined with others to show a strengthening American manufacturing sector.
"World growth is stronger than you think. No wonder U.S. manufacturers are on a hiring spree," Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ, said in a note to clients.
Forecasting firm Macroeconomic Advisers raised its expectation of third-quarter growth to a 3.1% annual rate from 2.7%.


A smaller trade deficit generally helps the economy over the long term because it means a growing share of money in the U.S. is being spent on goods and services domestically rather than abroad.
Thursday's report showed the U.S. economy continuing to benefit from energy production, with the July petroleum deficit reaching the lowest level since May 2009.
Exports of overall goods reached a record, without adjusting for inflation. That reflected higher shipments of automobiles and car parts, along with industrial supplies and capital goods. Exports of foods and consumer goods fell.
The rise in imports suggests businesses and consumers stepped up spending, though only on certain items, heading into the second half of the year. Imports of cars, industrial supplies and foods climbed. However, imports of consumer goods and capital goods declined.
Consumer and business spending rebounded in the second quarter from a first quarter marred by snowstorms and severely cold weather. Consumer spending has also been bolstered by stronger job growth this year. Economists expect higher household outlays to lead to steady economic growth in the second half of the year.
The economy grew at a 4.2% annual pace in the second quarter after contracting at a 2.1% rate in the first three months of the year. Many economists project growth to clock in at roughly a 3% rate in the current quarter.
Other signs point to a strengthening manufacturing sector. The Institute for Supply Management said earlier this week its purchasing managers index climbed to 59 last month, the best reading since March 2011. A reading above 50 indicates expanding activity in the factory sector. A subindex of exports also climbed, to 55 in August from 53 in July.
Thursday's report showed the trade gap with China expanded 2.7% to $30.9 billion, the highest on record. Exports to China declined while imports from the country to the U.S. rose.