GDP

August 28, 2025

The preliminary estimate of second quarter GDP rose 3.3% (which compares to the 3.0% increase for advance reading) and after having declined 0.5% in the first quarter.  Both the first and second quarter growth rates were distorted by the behavior of businesses with respect to the imposition of tariffs in April.  To beat the proposed increase in imports businesses imported far more imported goods than normal in the first quarter.  When that bloated level of imports was subtracted from the GDP calculation it resulted in a 0.5% decline in GDP.  As inventories returned to a more normal level in the second quarter, the reduced level of imports caused GDP growth to jump by 3.3% in the second quarter.  The change in imports subtracted 4.6% from GDP growth in the first quarter and then added 5.0% to GDP growth in the second quarter.

Final sales is GDP less the change in nonfarm business inventories.  Some of the imports in the first quarter were not actually used in that quarter.  They ended up in inventories.  The big increase inventories in the first quarter caused final sales to decline 3.1% in the first quarter.  As inventories returned to a more normal level in the second quarter, final sales jumped 6.8%.

Final sales to domestic purchasers is GDP less the change in both inventories and trade.  In this case both of those latter two categories were distorted by the imposition of tariffs in early April.  Final sales to domestic purchasers rose 1.5% in the first quarter and 1.6% in the second quarter.  In  our opinion, the 1.6% average increase in final sales to domestic purchasers in the first half of the  year is probably the best guess at the trend growth rate for GDP in the first  half of the year.

Personal consumption expenditures rose 1.6% in the second quarter after climbing 0.5% in the first quarter.  Despite the imposition of tariffs, layoffs in the federal government sector, expulsion of illegal (and some legal) immigrants, consumers largely shrugged off these changes and continued to spend at a moderate pace.  With real disposable income having risen 1.7% in the past year and real personal consumption expenditures rising 2.1%, consumer spending may slow somewhat in 2025.  For what it is worth we expect consumer spending to increase 1.5% in the second half of the year which would imply 1.3% growth in 2025.

Nonresidential investment rose 5.7% in the second quarter (which compares to the early reading which registered a much more modest 1.9% gain in the second quarter) after having surged 10.3% in the first quarter.  Spending on structures declined 8.9% in the second quarter.  Equipment spending climbed by 7.4%.  Intellectual property rose at a steamy 12.8% pace in the second quarter (which compares to a 5.1% gain reported one month ago) after  having climbed 6.0% in the first quarter.  This is AI in action.  Firms are working hard to find ways to adapt AI to help their employees become more productive.  Rapid growth in this category should climb for years to come.

]The deficit for real net exports shrank by $338.0 billion in the second quarter to $1,029.0 billion after  having widened by $306.3 billion in the first quarter.  These swings are entirely attributable to firms’ efforts to avoid the newly imposed tariffs that began in early April.  In the second quarter exports declined 1.3% while imports plunged by 29.8%.  This narrowing of the trade gap added 5.0%  to GDP growth in the second quarter after subtracting by 4.6% in the first quarter.

Federal government expenditures declined 4.8% in the second quarter after  having declined 4.6% in the first quarter.  In the second quarter defense spending rose 1.5% while nondefense spending declined 12.5%,

After declining 0.5% in the first quarter and growing by 3.3% in the second quarter, we expect GDP growth of 2.5% in the final two quarters of year which would means that for the year GDP should grow 1.9%.