CNN WIRE: US economy rebounded sharply in second quarter

Tariff-driven buying frenzies at the beginning of the year have made it difficult to asses the underlying health and direction of the world’s largest economy.
Robert Gauthier/Los Angeles Times/Getty Images via CNN Newsource

Originally Published: 30 JUL 25 08:31 ET

Updated: 30 JUL 25 09:56 ET

Washington (CNN) — The US economy expanded sharply in the second quarter as businesses dialed back on imports after stocking up earlier in the year to get ahead of President Donald Trump’s tariffs.

Gross domestic product, which captures all the goods and services produced in the economy, registered an annualized rate of 3% in the April-through-June period, the Commerce Department said Wednesday. That’s up sharply from the -0.5% rate in the first quarter, which was the first quarterly GDP decline since 2022. Economists polled by data firm FactSet estimated second-quarter GDP to come in at a 2% rate.

The latest GDP report is a key part of an avalanche of economic news this week expected to show how consumers and businesses are weathering Trump’s sweeping economic policies. But the tariff-driven buying frenzies in the beginning of the year have made it difficult to asses the underlying health and direction of the world’s largest economy.

In the first quarter, surging imports took a toll on economic growth, but that trend reversed in the second quarter as businesses drew from their existing inventories instead of importing, in turn boosting GDP.

After surging nearly 38% from January through March, imports plummeted 30.2% in the following three-month period. That contributed the lion’s share of economic growth from April through June when also factoring in exports, which add to GDP.

The economy is holding up — for now

Underlying details in the report also show that consumers and businesses have slowed their spending, but haven’t quite retrenched in the face of persistent uncertainty about the economy, which is helping propel economic growth.

“My motto these past six years at Morgan Stanley is don’t underestimate the resilience of the US economy,” Sarah Wolfe, senior economist at Morgan Stanley Wealth Management, told CNN. “That doesn’t mean we’re not in a slowdown, but I think it takes quite a bit to push the US into a recession. We have a pretty dynamic economy, for better or for worse.”

Consumer spending, which powers about 70% of the US economy, picked up sharply in the second quarter to a 1.4% rate, up from the anemic 0.5% in the first quarter. Meanwhile, businesses slowed their spending sharply during the same period, to 1.9% from 10.3%, mostly reflecting a recalibration from the front-running earlier in the year.

Still, the economy isn’t out of the woods and things could take a turn for the worse: A key gauge of underlying demand in the economy — real final sales to private domestic purchasers, also referred to as “core GDP” — slowed in the second quarter to an annualized rate of 1.2%, the weakest pace since the fourth quarter of 2022, down from 1.9% earlier in the year.

“Headline numbers are hiding the economy’s true performance, which is slowing as tariffs take a bite out of activity,” Kathy Bostjancic, chief economist at Nationwide, said in commentary issued Wednesday. “If core GDP performance continues at this pace, we expect there will be even more pressure on the Fed to lower rates as the economy slows.”

What it means for the Fed

The economy’s latest health check comes as Federal Reserve officials convene in Washington, DC, for a contentious debate on interest rates.

The Fed is expected to announce later Wednesday that it is keeping interest rates unchanged for the fifth consecutive meeting. The move, however, could draw dissents from two Fed governors — Fed Governor Christopher Waller and Fed Vice Chair for Supervision Michelle Bowman — which would be the first time two governors have done so in more than 30 years.

The economy’s resilience, as evidenced by the latest GDP report, doesn’t help build a convincing case that the Fed needs to be actively considering a rate cut to simulate growth.

And neither has the latest employment data so far, which shows that unemployment remains at historically low levels. On Friday, the Labor Department will report if that’s still the case when it releases its monthly jobs report.

The Fed steps in with rate cuts whenever it’s clear that the economy is bound to weaken, pushing up unemployment. In addition to fighting inflation, the Fed is also responsible for keeping the labor market intact.

But even if the economy doesn’t fall off a cliff, the Fed is still widely expected to resume rate cuts later this year. Investors expect rate cuts in September and in December, according to futures.

“They’re at a moment when most in the (Fed’s rate-setting) committee think it will be appropriate to cut rates fairly soon, but they might be disagreeing over exactly how much evidence they need or how comfortable they have to be before they start cutting rates again,” William English, a former senior Fed adviser, told CNN.