WASHINGTON (Reuters) -The U.S. economy grew faster than previously estimated in the second quarter amid strong consumer spending and business investment, though momentum appears to have ebbed against the backdrop of lingering uncertainty from trade policy.
The quickest growth pace in nearly two years reported by the Commerce Department on Thursday also reflected a sharp contraction in the trade deficit as the flood of imports slowed.
The economy’s resilience was underscored by other data showing strong demand by business for equipment in August and a drop in first-time applications for unemployment benefits last week as companies hoard workers.
The data at face value suggested further interest rate cuts from the Federal Reserve were probably unwarranted. Tepid hiring blamed by economists on President Donald Trump’s tariffs on imports and an immigration crackdown caused job growth to almost stall in the three months through August, prompting the U.S. central bank to resume cutting rates last week.
“It is clear that the current level of Fed interest rates is not slowing the economy down and is not hurting the labor market either,” said Christopher Rupkey, chief economist at FWDBONDS. “If job growth is slowing down, it is not the economy that is the problem, it is the Trump 2.0 policies on immigration. The economy is steady as a rock.”
Gross domestic product increased at an upwardly revised 3.8% annualized rate last quarter, the fastest pace since the third quarter of 2023, the Commerce Department’s Bureau of Economic Analysis (BEA) said in its third GDP estimate.
The economy was previously reported to have grown at a 3.3% pace in the second quarter. Economists polled by Reuters had expected GDP growth would be unrevised.
The government revised the national accounts data from the first quarter of 2020 through the first quarter of 2025. The economy contracted at a 0.6% pace in the first quarter, revised slightly down from the previously reported 0.5% pace of decline.
A sharp contraction in the trade deficit as imports dropped following a record surge in the first quarter was the main driver of a sharp rebound in GDP last quarter. The smaller trade deficit added a record 4.83 percentage points to GDP growth.
A front-loading of imports as businesses rushed to beat import duties, which boosted the nation’s average tariff rate to its highest level in a century, depressed GDP in the January-March quarter. GDP snapped back last quarter as the flow of foreign goods eased.
TEPID GROWTH IS EXPECTED IN THE SECOND HALF
Both the first- and second-quarter GDP readings are not a true reflection of the economy’s health because of the wild swings in imports. Economists expect a tepid second half because of the lingering uncertainty from trade policy, which would limit economic growth to about 1.5% for the full year. The economy grew 2.8% in 2024.
A sharp upward revision to consumer spending, which accounts for more than two-thirds of the economy, accounted for the bulk of the upgrade to GDP last quarter. Spending is now estimated to have increased at a 2.5% pace, revised up from the previously reported 1.6% rate. It increased at a 0.6% rate in the first quarter, a slight raise from the 0.5% pace published last month.
There were also upward revisions to business spending on intellectual property products, now estimated to have expanded at a 15.0% rate, rather than the 12.8% estimated last month.
Growth in business investment in equipment was revised up to a 8.5% rate from the previously reported 7.4% pace.
Final sales to private domestic purchasers, which exclude trade, inventories, and government, and are viewed by economists and policymakers alike as a barometer of underlying economic growth, grew at a 2.9% rate in the second quarter. That was an upward revision to the previously reported 1.9% pace.
U.S. stocks fell as investors viewed the data as not supportive of further rate cuts. The dollar rose against a basket of currencies. U.S. Treasury yields were higher.
A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 14,000 to a seasonally adjusted 218,000 for the week ended September 20. Economists had forecast 235,000 claims for the latest week.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, slipped 2,000 to a seasonally adjusted 1.926 million during the week ending September 13, the claims report showed.
The so-called continuing claims covered the period during which the government surveyed households for September’s unemployment rate. Continuing claims fell between the August and September survey weeks. The jobless rate increased to a near four-year high of 4.3% in August.
A third report from the Commerce Department’s Census Bureau showed non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rose 0.6% in August after surging 0.8% in July.
Economists had forecast these so-called core capital goods orders dipping 0.1%. Shipments of core capital goods slipped 0.3% after rising 0.6% in July.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
Comments