US economic growth likely rebounded in Q2, but with weak underlying details
A rush to beat the duties boosted imports in the first quarter, resulting in a record goods trade deficit that weighed on the economy. That reversed last quarter, with imports declining at a record 30.3% rate. The resulting smaller trade deficit added a record 4.99 percentage points to GDP, more than offsetting a 3.17-percentage-point drag from inventories.
Stocks on Wall Street were higher. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.
MODERATE CONSUMER SPENDING
Trade and inventories are the most volatile components of GDP. Consumer spending, which accounts for more than two-thirds of economic activity, increased at a 1.4% pace after rising at a 0.5% rate in the January-March quarter.
Spending was lifted by motor vehicles, likely reflecting pre-emptive buying ahead of import duties. There were also increases in spending on healthcare as well as at restaurants, bars, hotels, and motels.
With the labor market slowing amid hesitancy by businesses to increase headcount, consumer spending could be sluggish for the remainder of the year. Higher prices from tariffs, which started showing in the June consumer inflation data, could also hamper consumer spending.
Middle- and higher-income households have largely been driving spending. Economists say low-income consumers, already disproportionately affected by higher interest rates and slowing wage growth, would be the hardest hit by tariffs. They also noted the One Big Beautiful Bill's tax cuts and spending provisions would not benefit lower-income households.
The nonpartisan Congressional Budget Office has estimated the bill will add $3.4 trillion to the nation's $36.2-trillion debt and only raise inflation-adjusted GDP by an average of 0.5% over 10 years. But pressures are also building up for middle- and higher-income households.
"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.
Business spending on equipment grew at a 4.8% rate, slowing from the first quarter's robust 23.7% pace. Spending on structures such as factories declined for a second straight quarter. Residential investment contracted at a 4.6% rate, the most since the fourth quarter of 2022, amid high mortgage rates.
Federal government spending fell for the second consecutive quarter. The trend is likely to persist amid deep spending cuts on programs outside defense and immigration enforcement.
Final sales to private domestic purchasers, which exclude trade, inventories, and government, and are viewed by economists and policymakers alike as a barometer of underlying economic growth, grew at a 1.2% rate. That was the slowest increase in domestic demand since the fourth quarter of 2022 and followed a 1.9% growth rate in the first quarter.
"These numbers show an economy that has weakened considerably," said Eugenio Aleman, chief economist at Raymond James.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci, Rod Nickel)
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