Economy posts sturdy growth in 2nd quarter but tariffs again skew the numbers
President Donald Trump’s global trade war has again distorted the broadest snapshot of the U.S. economy – this time creating a brighter picture.
The economy grew solidly in the second quarter but forecasters traced the showing to the reversal of a tariff-related import surge that caused output to shrink early this year.
Consumer spending and business investment increased modestly and growth is projected to slow further in the second half of the year as more of Trump’s import fees filter into retail prices.
The nation’s gross domestic product, the value of all goods and services made in the U.S., grew at a seasonally adjusted annual rate of 3% in the April-June period, the Commerce Department said July 30. Economists surveyed by Bloomberg had forecast a 2.4% increase.
Trump boasted about the performance in a post on Truth Social, saying the Federal Reserve, which meets at 2 p.m. Wednesday, should now cut interest rates.
“2Q GDP JUST OUT: 3%, WAY BETTER THAN EXPECTED! “Too Late” MUST NOW LOWER THE RATE. No Inflation! Let people buy, and refinance, their homes!” Trump said.
The Fed, however, is expected to hold rates steady as it awaits the effects of Trump's tariffs on inflation. And a strong GDP gain is more likely to bolster the Fed's plan to stand pat on rates rather than undermine it.
Plus, the gain in economic output was artificially boosted by a sharp drop in imports, just as the 0.5% decline in GDP the first three months of the year – the economy's first contraction in three years – was rooted in a historic spike in shipments from foreign countries.
With Trump’s double-digit tariffs looming, American retailers and manufacturers raced to order foreign goods early in the year before the levies took effect. That led to an unprecedented flood of imports, which must be subtracted from GDP - the goods that consumers, companies and the public sector bought – because they’re made overseas.
Since those purchases were pulled forward, companies didn’t need to order as many goods from other countries last quarter and imports plunged 30.3%, reversing the 37.9% rise that dampened output earlier and bolstering U.S. growth. As a result, those foreign shipments added 5.2 percentage points to growth after subtracting a whopping 4.7 points in the January-March period.
A more telling gauge of the economy’s health that captures consumer and business spending but strips out trade, inventories and government outlays – called final sales to private domestic purchasers – rose a modest 1.2%, down from 1.9% in the first quarter.
Another way to measure underlying growth is to average the results in the first and second quarters, Pantheon Macroeconomic said. That reveals the economy grew just 1.2% the first half of 2025, down from a nearly 3% pace the previous two years.
"Underlying growth was weak in Q2 and took a material step down in the first half of this year compared to 2024," economist Oliver Allen of Pantheon Macroeconomics wrote in a note to clients.
Is the economy doing well right now?
The bigger picture: Forecasters expect the economy to slow in coming months as Trump’s tariffs reignite inflation and sap consumer purchasing power. Economists project growth of less than 1% in both the third and fourth quarters, according to those surveyed by Wolters Kluwer Blue Chip Economic Indicators.
Forecasters predict the Labor Department on Aug. 1 will announce that 109,000 jobs were added in July, according to the median estimate of a Bloomberg survey. That would be down from 147,000 in June and an average of 130,000 so far this year.
Although the White House has struck trade deals in recent weeks with countries such as the United Kingdom, the European Union, Indonesia, Vietnam and Japan, the average US tariff rate still has shot up to about 20% from less than 3% early in the year, Nationwide economist Kathy Bostjancic estimates. That likely will push annual inflation from 2.7% to 3% by year’s end, she said. Absent the duties, inflation likely was headed back toward the Federal Reserve’s 2% goal, economists figure.
Additional tariffs that further drive up inflation could take effect by a Aug. 1 deadline if administration officials don't reach deals with dozens of countries.
When can we expect the Fed to lower interest rates?
Economists don’t expect the GDP report to move the needle on a Federal Reserve decision on interest rates slated to be announced at 2 p.m. ET.
The Fed is expected to hold rates steady for a fifth straight meeting despite persistent pressure from Trump to decrease rates, though futures markets are betting on a mid-September rate cut.
Normally, a sturdy GDP figure might make the Fed even less inclined to lower rates. The Fed shaves rates to support a weak economy and raises rates, or keeps them high longer, to fight inflation. But since the data was again skewed by tariff effects, officials are likely to put less weight on the numbers.
For now, Fed officials are more focused on maintaining their wait-and-see approach to rate reductions as they assess how much the import charges push up inflation in coming months - barring a downturn in the labor market.
Here’s how parts of the economy fared in the second quarter:
Consumer spending
Consumer spending grew 1.4% following a meager 0.5% gain in the first quarter but that’s half of last year’s pace. Consumption makes up 70% of economic activity.
Americans’ outlook has dimmed this year as the prospect of hefty tariffs has sparked inflation worries and a slowing labor market has crimped income gains.
Business investment rises slightly
Business investment rose 1.9% after surging 10.3% the previous quarter.
Company purchases of computers, delivery trucks, factory machines, and other equipment grew a fairly healthy 4.8%.
But spending on buildings, oil rigs and other structures plummeted 10.3%.
Business stockpiling is a big drag on growth
Because of the drop in imports, companies added significantly less to their inventories and stockpiling subtracted an outsize 3.2 percentage points from growth.
Housing starts, renovations decline
Housing construction and renovation slid 4.6%, its fourth decline in the last five months.
Residential investment has been sluggish in part because builders are concerned that tariffs will sharply increase the cost of lumber, steel, aluminum and other building materials.
Also, high mortgage rates – a byproduct of inflation and Fed rate hikes – have discouraged many potential home buyers.
Government spending edges higher
Government outlays rose just 0.4%. Federal government spending fell 3.7% as the Department of Government Efficiency (DOGE) continued its hefty budget cuts and layoffs.
State and local spending increased 3%.
Contributing: Joey Garrison