US GDP beats expectations at 3% as trade masks weak demand
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The news: US economic growth rebounded at a 3.0% annualised rate in the second quarter, exceeding expectations and reversing a 0.5% contraction in the first, the Commerce Department’s Bureau of Economic Analysis said.
But while the headline GDP growth appeared strong, underlying demand was soft, with declining imports accounting for most of the improvement.
Economists emphasised that the improvement was inflated by volatile trade figures rather than robust domestic activity. Consumer spending remained weak, business investment slowed, and residential investment contracted again.
The numbers: Net exports added 4.99 percentage points to GDP, while inventories subtracted 3.17 points. But consumer spending rose 1.4%, marking the tamest growth in consecutive quarters since the pandemic.
A key measure of underlying demand, final sales to private domestic purchasers, increased at a 1.2% rate, the slowest since late 2022. Business investment growth also cooled and residential investment fell 4.6%.
Inflation cooled, with the Fed's preferred gauge of underlying inflation rising 2.5%, a deceleration from 3.5% in the first quarter.
The context: The data comes three months after US President Donald Trump announced globe-spanning tariffs in April, then paused and delayed threats to raise them further while negotiating trade deals with key partners, in a pattern that has fuelled policy uncertainty.
What they said: “Strong headline growth in the US masks cooler domestic demand,” said ING economist James Knightley. “The details show that net trade was the main driver of growth as imports snapped back lower following their first-quarter surge when companies sought to beat the introduction of tariffs. Nonetheless, consumers are nervous about the outlook, construction is struggling and business investment has lost momentum. We continue to expect 1.6% GDP growth in 2025 versus the 2.8% recorded in 2024.”
Trump welcomed the better-than-expected 3% GDP reading in a social media post and renewed calls for the Federal Reserve to cut interest rates, ahead of its policy meeting conclusion later Wednesday where officials are widely expected to keep borrowing costs unchanged.
The sources: Bureau of Economic Analysis, Bloomberg, Reuters
