US Economy Expands 3% in Q2, Driven by Trade Deficit Narrowing

The United States economy expanded by 3% in the second quarter, exceeding the market's forecast of 2.6%. This growth was primarily driven by a narrowing trade deficit, which offset underlying weaknesses in key areas such as consumer spending and business investment. The data indicates that while the economy showed signs of recovery, the fundamental drivers of growth remain fragile.

The trade deficit's contribution to GDP growth was substantial, adding approximately 4.1 percentage points to the overall growth rate. This was largely due to a significant drop in imports, which had previously dragged down the economy by 4.6 percentage points in the first quarter. However, when excluding the impact of trade, the growth in domestic demand and personal consumption expenditures has slowed considerably from the 2.5% to 3% range seen in the past two years to around 1.1% in the first half of the year.

Economists caution that the overall GDP data may not provide an accurate reflection of the economy's underlying health. The unpredictable tariff strategies have created a climate of caution among businesses, affecting investment decisions and overall economic sentiment. Despite recent trade agreements, the effective tariff rate remains high, and a significant portion of imports are still not covered by any agreements. This uncertainty is expected to keep the economy's growth rate below 1.5% in the second half of 2025, with the full-year growth rate projected to be around 1.5% or lower, significantly below the 2.8% growth seen in 2024.

Consumer spending, which accounts for more than two-thirds of the U.S. economy, showed only modest growth in the second quarter after nearly stagnating in the first quarter. Business investment in equipment is also expected to be lackluster, potentially even declining. Consumer confidence remains fragile, with the Consumer Confidence Index rising slightly in July but still well below the 2024 average. The labor market, a key indicator of economic health, also showed signs of weakness, with the difference between those who find jobs "plentiful" and those who find them "hard to get" declining to a level not seen since 2017.

The Federal Reserve is expected to maintain its benchmark interest rate range during its policy meeting, despite pressure to cut rates. The central bank's focus will be on the labor market, where any significant increase in job cuts could prompt a change in policy. Economists predict that the next rate cut may not occur until December, making the labor market a critical factor in determining the Fed's future policy direction.

The long-term outlook for the U.S. economy also faces structural challenges. While the "Tax Cuts and Jobs Act" has reduced some fiscal policy uncertainties, it is estimated to add 3.4 trillion dollars to the national debt over the next decade, with only a modest 0.5% average boost to inflation-adjusted GDP. This highlights the need for sustainable economic policies that can support long-term growth without exacerbating fiscal imbalances.