US economy rebounds in second quarter; but underlying trend is soft

US economic growth rebounded more than expected in the second quarter, but that grossly overstated the economy's health as subsiding imports accounted for the bulk of the improvement and domestic demand increased moderately. 

Gross domestic product increased at a 3.0 per cent annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said in its advance estimate of second-quarter GDP on Wednesday. The economy contracted at a 0.5 per cent pace in the January-March quarter, the first GDP decline in three years. 

The main GDP figure was heavily distorted by trade as was the case in the first quarter. Economists say President Donald Trump's protectionist trade policy, including sweeping tariffs on imports as well as delaying higher duties, has made it difficult to get a clear pulse on the economy. 

 

Economists urged focusing on final sales to private domestic purchasers, viewed by economists and policymakers alike as a barometer of underlying US economic growth. This measure grew at a 1.2 per cent rate after advancing at a 1.9 per cent rate in the first quarter. That was the slowest increase in domestic demand since the fourth quarter of 2022. 

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 trend reversed last quarter. Imports are a subtraction in the calculation of GDP. 

A Reuters survey of economists had forecast GDP rebounding at a 2.4 per cent annualized rate. The survey was, however, concluded before data on Tuesday showed the goods trade deficit shrinking to its smallest in nearly two years in June and inventories rising marginally. 

That prompted economists to upgrade their GDP growth estimates by as much as 0.8 percentage point to as high as a 3.3 per cent pace. Trade and inventories are the most volatile components of GDP. 

Economists anticipated lackluster economic growth in the second half. Though the White House has announced a number of trade deals, economists said the nation's effective tariff rate remained one of the highest since the 1930s and noted that about 60 per cent of the nation's imports remained uncovered by an agreement. 

Economists expect the Federal Reserve will keep its benchmark interest rate in the 4.25 per cent-4.50 per cent range after the end of a two-day policy meeting on Wednesday, resisting pressure from Trump to lower borrowing costs. The Fed cut rates three times in 2024, with the last move coming in December.