US Economy Grows 3.0% in Q2, Masking Slowdown in Domestic Demand
The U.S. economy grew at a surprisingly strong 3.0% annualized rate in the second quarter, rebounding from a contraction earlier in the year. However, the headline figure was heavily distorted by a sharp drop in imports, masking a significant slowdown in domestic demand that points to moderating economic health.
According to the Commerce Department’s report on Wednesday, a steep decline in imports contributed 4.99 percentage points to GDP growth, reversing a trend from the first quarter where a surge in imports weighed on the economy. This positive contribution from trade more than offset a drag from business inventories. The U.S. economy had contracted at a 0.5% pace in the first quarter of 2025.
Sluggish Domestic Demand
Beneath the surface, key indicators of economic health showed signs of weakness. Consumer spending, the primary driver of the U.S. economy, grew at a modest 1.4% pace. Business investment in equipment slowed considerably, and residential investment contracted for the second straight quarter.
A key measure watched by economists, private domestic purchases, which strips out volatile trade and inventory data, rose at only a 1.2% rate—its slowest pace in two-and-a-half years.
“The economy is not in a recession is the good news. The bad news is that this is not a report of robust growth which would make one confident about the economic outlook for the second half of 2025,” said Christopher Rupkey, chief economist at FWDBONDS.
Trade Uncertainty and Fed Outlook
Economists point to ongoing trade policy uncertainty under the Trump administration as a headwind, making it difficult for businesses to plan and invest, with spillover effects on hiring and spending.
The report comes as the Federal Reserve concludes a two-day policy meeting, where it is widely expected to hold its benchmark interest rate steady in the 4.25%-4.50% range. Despite the strong headline GDP number, some analysts believe the underlying weakness could lead to future rate cuts. The Fed last cut rates in December 2024.
“Now that delinquencies are starting to rise for upper-income consumers, we expect consumer spending to moderate further in the coming quarters,” said Jeffrey Roach, chief economist at LPL Financial (NASDAQ:LPLA). “The Fed will likely be in a good place to cut rates by their September meeting.”
In response to the data, the U.S. dollar strengthened against a basket of currencies, and U.S. Treasury yields rose.
