Overview
The U.S. economy rebounded by 3% annual growth in the second quarter of 2025 after a first-quarter downturn, but underlying data reveal persistent concerns, especially regarding tariffs, investment, and consumer spending.
Second Quarter Economic Performance
- U.S. GDP grew at a 3% annual rate from April to June 2025, surprising economists who predicted 2% growth.
- This follows a 0.5% GDP decline in the first quarter, the first U.S. economic contraction in three years.
- Growth was boosted by a significant drop in imports, adding over 5 percentage points to GDP.
Consumer Spending and Investment Trends
- Consumer spending rose by 1.4% in Q2, improving from 0.5% in Q1 but still considered weak.
- Private investment fell at a 15.6% annual pace, the largest drop since the COVID-19 pandemic.
- Lower inventories after stockpiling ahead of tariffs subtracted 3.2 percentage points from GDP growth.
Tariffs, Trade Wars, and Economic Uncertainty
- The first-quarter downturn was largely due to a surge in imports as businesses rushed in goods before tariffs took effect.
- Tariffs and trade policy changes under President Trump created uncertainty for consumers and businesses.
- Economists warn tariffs may hurt the economy by raising costs and potentially causing inefficiency and inflation.
Inflation and Government Spending
- The Federal Reserve's preferred inflation measure, the PCE price index, increased 2.1% in Q2, down from 3.7% in Q1.
- Core PCE inflation (excluding food and energy) was 2.5% in Q2, down from 3.5%.
- Federal government spending and investment decreased by 3.7% in Q2, following a 4.6% drop in Q1.
Key Terms & Definitions
- GDP (Gross Domestic Product) — Total value of goods and services produced in a country.
- PCE (Personal Consumption Expenditures) Price Index — A measure of inflation based on consumer spending.
- Core PCE Inflation — PCE inflation excluding food and energy prices.
- Tariff — A tax on imported goods, often used to protect domestic industries.
Action Items / Next Steps
- Review how tariffs influence GDP components for upcoming assessments.
- Study effects of consumer spending and investment trends on economic growth.
- Prepare for discussions on the role of trade policy in economic performance.