Real GDP (Q2-2025, advance estimate)

Q2 GDP flattered by unwinding of Q1's tariff front-running

• The U.S. economy expanded by 3.0% quarter-on-quarter (q/q, annualized) in the second quarter – slightly above the consensus forecast of 2.6% – and up sharply from Q1's contraction of 0.5%.
• Consumer spending rose 1.4% q/q, a modest acceleration from Q1's 0.5%. Spending on both goods (2.2% from 0.1%) and services (1.1% from 0.6%) accelerated relative to Q1. 
• Business investment rose 1.9% q/q, but that came after a very strong gain in the first quarter – largely driven by firms front-loading capital spending ahead of the tariffs. In terms of the breakdown, both equipment (+4.8% q/q) and intellectual property products (6.4%) were higher, while spending on structures (-10.3% q/q) declined for a second consecutive quarter. 
• Residential investment declined 4.6% q/q, as homebuilding reached a new cyclical low in Q2. Home sales trended lower and remain 30% below its level prior to the Fed initiating its tightening cycle in 2022.
• Government spending rose a modest 0.4%, as an uptick in state & local spending (+3.0%) more than offset the pullback at the federal level (-3.7% q/q). 
• As was the case in Q1, international trade was a major factor influencing growth last quarter. Imports plummeted by 30.3% q/q – following a gain of 37.9% q/q in Q1 – largely owing to a sharp pullback in goods imports (-35.3% q/q). Meanwhile, exports contracted by a more modest 1.8% q/q, resulting in net trade adding 5.0 percentage points (pp) to Q2 GDP. Meanwhile, inventory investment subtracted 3.2pp from headline growth.  
• Final sales to private domestic purchasers, a better gauge of underlying demand as it includes only household consumption and fixed investment slowed to 1.2% from 1.9% in Q1. 
• Core PCE inflation – the Fed's preferred inflation gauge – was 2.5% q/q (annualized), a notable deceleration from Q1's 3.5%.

Key Implications

• Headline GDP growth for the second quarter overstated the degree of strength in the U.S. economy. An unwinding of Q1's tariff front-running resulted in imports contracting by the largest amount (outside of the pandemic) since the height of the global financial crisis, resulting in a massive positive contribution to GDP. Once the effects of net trade, inventories and government were removed, sales to private domestic purchasers, expanded by just 1.2% or its slowest rate of growth in 2.5 years.  
• Tomorrow's release of personal income & spending for June will shed more light on how consumer spending ended last quarter. Retail sales for June (released on July 17th) suggest spending turned higher last month, but that's only after falling sharply the month prior – leaving June's level roughly unchanged from April. With inflationary pressures likely to heat-up over the coming months alongside some expected softening in the labor market, the backdrop for consumer spending is looking increasingly fragile. Our current GDP tracking has the economy expanding by around 1.0% in Q3.

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