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Estimates of second-quarter GDP growth, to be released on July 30, are running from 3% to 4% at the moment. These estimates will change as more data comes in, but they indicate that the weak growth of the first quarter will be reversed. However, just as investors shouldn’t have been fooled by the decline in first-quarter GDP, they shouldn’t be fooled by the strength in the second quarter. Both quarterly numbers have been whipsawed by businesses hurrying to bring in imports before tariffs took effect. A more reasonable view of current growth is to simply average the two numbers together, for a 1.4% growth rate in the first half of the year.
Growth in the second half of 2025 will likely be tepid, at around 1.0%, so that the full year’s growth over four quarters will be 1.2% to 1.4%. The numbers cited in the media for 2025 will be higher, at 1.7% to 1.9%, because these will be for 2025’s mid-point compared with 2024’s mid-point. We expect the moderate growth trend to continue through 2026.
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First-quarter GDP contracted 0.5%. Imports surged, which detracts from the GDP numbers, as businesses and retailers sought to rush in imported goods ahead of threatened tariffs. The rise in imports subtracted five percentage points from first-quarter growth. This was partially counterbalanced by a three-point contribution from extra business spending on equipment and inventories.
The more moderate growth in consumer spending in the first quarter indicates that consumers had already begun pulling back somewhat, even before the tariffs took effect, though large snowstorms in January and February may have played a role in that, too. The first-quarter GDP contraction would have been about 0.2 percentage points worse if not for a surge in car buying in March, ahead of the April 2 effective date for the new auto import tariff.
Storm clouds will loom over the economy if the trade war is sustained. That would hurt U.S. exports and could extinguish the recent revival in manufacturing. Consumer sentiment has dropped significantly, 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 and nonprofits. The ripple effect of canceled contracts beyond government agencies is unknown, but potentially high. Uncertainty is also likely to hurt business spending on equipment and hiring. Consumers have begun to save more, perhaps because they feel insecure about their jobs going forward. Foreign tourism is likely to be down as well, perhaps subtracting a tenth from GDP growth.
Source: Department of Commerce: GDP Data
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