US economy rebounds in second quarter despite tariff volatility

GDP up 3% on strong consumer spending and declining imports

A container ship leaving Port Jersey. The US economy's second-quarter boost was partly down to a drop-off in imported goods. AFP

The US economy rebounded at a better-than-expected pace in the second quarter, strengthened by consumer spending and a decrease in imports.

Gross domestic product (GDP), a measure of total goods and services produced, rose 3 per cent, when adjusted for seasonality and inflation, during the April-June period, the Commerce Department said in its advance second-quarter estimate on Wednesday.

A Reuters survey of economists had forecast GDP to increase at a 2.4 per cent annualised rate.

Last quarter's growth followed a 0.5 per cent contraction in the January-March period as business rushed to stockpile imports ahead of President Donald Trump's tariffs.

Consumer spending

The Commerce Department attributed the second-quarter rebound to a decrease in imports and an increase in consumer spending. Those were partly offset by decreases in investment and exports.

Consumer spending picked up a little more momentum, rising 1.4 per cent versus a 0.5 per cent rise in the previous period.

Mr Trump's initial announcement on April 2 – a blanket 10 per cent tariff on nearly all trading partners and harsher “reciprocal” tariffs – shook financial markets before he reversed course a week later.

Most investors were largely fearful that the sweeping tariff announcement would spark an economic slowdown, and his stop-start approach towards the charges' implementation brought more uncertainty.

Markets have since come back in force as he delayed tariffs' implementation date and agreed to a temporary trade truce with China following escalatory tit-for-tat charges.

The S&P 500 recorded a six-day streak of record-highs before closing lower on Tuesday following stalled trade talks between the US and China in Sweden.

Bernard Yaros, lead US economist at Oxford Economics, said the headline GDP's top-line numbers mask a broader slowing trend.

"Consumers are slowing their spending but not heading for the bunkers outright," he wrote to clients. "Personal spending growth will remain subdued as the labour market loses momentum and the real income shock from tariffs takes fuller form."

Tariff effects

Real final sales to private domestic buyers, a measure the Fed uses to determine domestic economic strength, rose 1.2 per cent in the last quarter, down from the 1.9 per cent gain in the previous three months.

Wednesday's report is the latest in a series of macroeconomic data this week that was expected clarify the state of the US economy as it contends with high interest rates and the effects of tariffs.

The latest report also came hours before the Federal Reserve announced it was holding interest rates steady yet again, with the UAE Central Bank mirroring its decision. The Fed has kept its target rate unchanged at 4.25 per cent and 4.50 per cent this year.

The Fed cut US interest rates in 2024, with the most recent in December, but has held pat this year owing to uncertainty surrounding tariffs.

Data released by the Commerce department on Wednesday showed the Personal Consumption Expenditures (PCE) price index – the Fed's preferred inflation metric – rose 2.1 per cent in the second quarter. Excluding food and energy, PCE inflation rose at 2.5 per cent.

Trump reaction

The better-than-expected GDP prompted Mr Trump to again push for the US central bank to lower the federal funds rate.

"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!" he wrote on the Truth Social media platform.

Meanwhile, data released earlier this week pointed to signs of a labour market that is continuing to cool.

The US Bureau of Labour Statistics on Tuesday reported that job openings and hirings declined last month. The hiring rate also fell to 3.3 per cent while the quits rate remained unchanged at 2 per cent.

“Persistently low churn also leaves the labour market looking more fragile than headline numbers suggest,” Wells Fargo economists Sarah House and Nicole Cervi wrote to clients on Tuesday.

Also on Tuesday, the Conference Board reported that US consumers' outlook on the current level of job availability weakened for a seventh month in a row, reaching its lowest level since March 2021.

Separate data this week was expected to provide further clues on the economy, including the Fed's preferred inflation metric on Thursday and June's unemployment report on Friday.