Tariffs may impact U.S. in 2026, OECD warns
The U.S. economy grew at a strong 3.8% annualized pace in the second quarter, the government reported Thursday in its final revision of gross domestic product data for April through June.
U.S. GDP — the nation's output of goods and services — rebounded in the spring from a 0.6% first-quarter drop caused by fallout from President Donald Trump's trade wars, the Commerce Department said. The department had previously estimated second-quarter growth at 3.3%, and forecasters had expected a repeat of that figure.
Consumer spending buoyed the economy in the second quarter, rising at a 2.5% pace, up from 0.6% in the first quarter and well above the 1.6% the government previously estimated. The data provides evidence that Americans continued to open their wallets despite broader economic headwinds such as tariffs and a slowing job market, economists noted.
"That was a meaningful bump-up from the previous estimate of 3.3% thanks to the mighty consumer," Priscilla Thiagamoorthy, senior economist at BMO, said in a Thursday report. "Today's run of data suggest that the economy — which strongly rebounded after the pandemic recession — continues to hold up well, even as we anticipate some slowdown ahead."
Spending on services advanced at a 2.6% annual pace, more than double the government's previous estimate of 1.2%.
The stronger-than-expected GDP data provides evidence that the economy remains on a solid footing, which may dampen the Federal Reserve's enthusiasm for additional rate cuts in 2025 and early 2026, economists noted. The central bank last week issued its first rate cut of 2025 when it reduced its benchmark rate by one-quarter point, with the Fed penciling in two additional cuts in 2025.
When announcing the rate cut last week, Fed Chair Jerome Powell pointed to a weakening labor market as prompting the move. Because rate reductions make it cheaper for businesses to borrow and expand, they can help bolster hiring and support the labor market.
"The Fed's September dot plot indicated that additional rate cuts are likely at their next two decisions in late October and December, but the case for back-to-back cuts is no slam dunk" after today's GDP data, said Bill Adams, chief economist for Comerica Bank, in a Thursday email.
Fed officials will be watching even more closely than unusual when their favorite inflation gauge — the Commerce Department's personal consumption expenditures (PCE) price index — comes out Friday.
Rebound from first quarter
The first-quarter GDP drop, the first retreat of the U.S. economy in three years, was mainly caused by a surge in imports — which are subtracted from GDP — as businesses hurried to bring in foreign goods before Trump could impose sweeping taxes on them. That trend reversed as expected in the second quarter: Imports fell at a 29.3% pace, boosting April-June growth by more than 5 percentage points.
A category within the GDP data that measures the economy's underlying strength came in stronger than previously reported as well, growing 2.9% from April-June, up from 1.9% in the first quarter and in the government's previous estimate. This category includes consumer spending and private investment, but excludes volatile items like exports, inventories and government spending.
But private investment fell, including a 5.1% drop in residential investment. Declining business inventories took more than 3.4 percentage points off second-quarter growth.
Spending and investment by the federal government fell at a 5.3% annual pace on top of a 5.6% drop in the first quarter.
Stephen Stanley, chief U.S. economist at Santander, noted that GDP growth averaged 1.6% in the first half of 2025 and consumer spending 1.5% — "not great but much better than initially thought.''
Since returning to the White House, Mr. Trump has added double-digit taxes — tariffs — on imports from almost every country and targeted specific products for tariffs, including steel, aluminum and autos. The president sees tariffs as a way to protect American industry, lure factories back to the U.S. and to help pay for the tax cuts he signed into law July 4.
Thursday's GDP report was the Commerce Department's third and final look at second-quarter economic growth. It will release its initial estimate of July-September growth on Oct. 30.
Forecasters surveyed by the data firm FactSet currently expect GDP growth to slow to an annual pace of just 1.5% in the third quarter.
