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The strong GDP growth of 3.8% logged in the second quarter won’t last. The import surge in the first quarter, before tariffs took effect, subsided, removing a major drag on the economy and pushing up the GDP figure for the second quarter. To see what the underlying growth trend is, the first- and second-quarter growth numbers should be averaged, which works out to 1.6% at an annual rate in the first half of the year. Third- and fourth-quarter growth should revert to a more normal pattern, with second-half growth coming in at a still-subdued 1.4%.
2025 annual growth will be higher, at around 1.8%, because the annual growth figure is measured from 2024’s mid-point through mid-2025. We expect this sub-2% growth trend to continue through 2026.
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Consumer spending was subdued in the second quarter for the second time this year. While purchases of durable goods bounced back from their first-quarter drop, consumption of services remained weak. Business purchases of equipment held up, but the declines in both housing and non-residential construction got worse. Government spending was nearly a wash: Federal defense and state and local government spending were positive, but federal nondefense spending dropped a whopping 12.5% at an annual rate.
Trade deals with Japan and the European Union have reduced the uncertainty that exporters and importers face, but at the cost of new tariffs that will hit importers and consumers. The effective tariff rate on imports is now around 15% across all goods. Higher rates are being imposed on common goods imports, such as home furnishings, toys, sports equipment and the like, but have not had a large impact on the Consumer Price Index yet. Price increases on motor vehicles will likely be coming later in the year as inventories of pre-tariff imported vehicles run low.
Tariffs will likely not cause a broader recession in the economy, however. Consumer sentiment is still low, though much more so among Democrats and independents than among Republicans. The Trump administration has not only been cutting federal employees, but also canceling contracts that sustain government contractors, nonprofits and universities. The ripple effect of canceled contracts beyond government agencies is unknown, but potentially high. Consumers will likely begin to save more, as there are some signs of slowing in the labor market. Foreign tourism is likely to be down as well, perhaps subtracting a tenth of a point from GDP growth over the course of the year.
Source: Department of Commerce: GDP Data
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