As long-duration Treasury yields continue their upward trajectory and global investors turn their attention to the Jackson Hole central bank symposium alongside US economic data, the July merchandise trade deficit unexpectedly widened to $118.8 billion. This figure far exceeded the market consensus of $100.5 billion and marked the largest shortfall since March 2025, representing what could be described as a "prosperity-driven trade deficit."

The expansion was underpinned by a surge in capital equipment imports, which propelled overall imports up 3.7%, while merchandise exports declined 2.9%. This divergence highlights the growing disconnect between robust domestic investment demand and the external trade performance. From an asset pricing perspective, a sustained widening of the US deficit could weigh on third-quarter real GDP through the net export channel. However, the continued strength in capital equipment imports—particularly those tied to artificial intelligence—serves as compelling evidence that corporate capital expenditure, especially investment and construction related to AI computing infrastructure, remains in full swing.

Following another blockbuster earnings report and an exceptionally strong outlook from Nvidia, the AI computing theme appears poised to expand beyond just GPU clusters. The trading momentum is likely to accelerate across the entire AI supply chain, including HBM/DRAM/NAND memory, CoWoS/3D advanced packaging, data center CPUs, optical interconnects, and data center power infrastructure, potentially triggering a new wave of sector-wide "main rally" supercycle. Morgan Stanley projects that nearly $3 trillion in AI-related infrastructure investment will flow through the global economy by 2028, with over 80% of that spending still ahead of us.

Goldman Sachs' latest calculations indicate that the global AI capital expenditure baseline model is expected to grow from $765 billion annually in 2026 to $1.6 trillion annually by 2031, with cumulative capital spending projected at approximately $7.6 trillion from 2026 to 2031. US data center power demand is expected to rise from 31GW in 2025 to 66GW by 2027, which will directly channel AI infrastructure investment into server CPUs, DRAM/NAND/HBM, advanced packaging, liquid cooling, power equipment, transformers, gas turbines, grid connection equipment, data center REITs, and construction engineering.

The rebound in capital equipment inbound shipments drove a surge in imports, pushing the US merchandise trade deficit to its widest level since early last year. Commerce Department data released Thursday showed the merchandise trade deficit expanded 17.2% from the prior month to $118.8 billion, the largest since March 2025. The median forecast from economist surveys had anticipated a much narrower deficit of just $100.5 billion. These figures are not adjusted for inflation.

US merchandise imports unexpectedly grew 3.7% in July, while merchandise exports fell 2.9%. Imports of capital goods—primarily comprising computers and accessories, semiconductors, and telecommunications equipment—recorded their largest increase since 1993. The trade deficit has been volatile in recent months, driven by the Iran war boosting global demand for US crude oil and refined petroleum products, while businesses have been stockpiling goods and raw materials amid energy inflation pressures to mitigate any negative impact from potential supply chain disruptions.

Imports of AI-related infrastructure hardware remain robust even as companies adapt to changing tariff rates. The $118.8 billion deficit reflects the AI boom—the US is forging its AI computing empire through a flood of imports. US merchandise imports rose 3.7% month-over-month to $318.2 billion in July, with capital equipment inbound shipments showing a clear rebound, while merchandise exports fell 2.9% to $199.4 billion. This aligns closely with the physical delivery logic of data centers continuously importing high-performance AI server components, core AI computing accelerators, network infrastructure equipment, data center power systems, and liquid cooling components.

However, the Commerce Department's advance data has not yet disclosed sufficiently detailed AI import figures, and tariff changes, supply chain stockpiling triggered by the Iran war, and other capital goods imports have also amplified the deficit. Cross-validating with Nvidia's earnings, the evidence chain for the US AI infrastructure buildout is now considerably more complete. Nvidia reported second-quarter fiscal 2027 revenue of $96.2 billion, up 106% year-over-year, with data center revenue surging 117% to $89 billion. Third-quarter revenue guidance came in at $108 billion, plus or minus 2%. Management further projects approximately 70% revenue growth for fiscal 2028, emphasizing that this outlook remains constrained by supply capacity, with the Vera Rubin platform already entering full-scale production ramp-up.

In other words, Nvidia's earnings validate the "orders and computing demand" side, while capital equipment imports validate the fact that "chips, servers, and data center infrastructure are being transported across borders and converted into physical assets on US soil." Minneapolis Fed research further shows that AI-related products are projected to account for 23% of US imports in 2025, a 73% increase from 2023, while non-AI imports grew only 3% over the same period. Without the AI construction wave, the US merchandise trade deficit in 2025 could have been nearly $200 billion smaller.

Retail inventory data released alongside the merchandise trade figures showed inventories increased 0.7%, with wholesalers continuing to build stock. Trade and inventory data will contribute to the government's initial estimate of third-quarter gross domestic product, scheduled for release in October. Prior to the latest merchandise trade report, the Atlanta Federal Reserve's GDPNow model projected that net exports would shave 0.14 percentage points off GDP growth. In the second quarter, net exports dragged GDP growth down by 1.14 percentage points. More complete July trade data, including the services trade account balance and inflation-adjusted merchandise trade figures, will be released on September 3.