Economic Growth Softens Amid Tariffs and Uncertainty

Despite a rebound in the spring, gross domestic product growth in the US softened in the first half of the year due to tariffs and uncertainty, causing consumers to pull back on spending. The Commerce Department reported that GDP grew at a 3 percent annual rate in the second quarter, but this figure was skewed by trade and inventory swings caused by President Trump's shifting tariff policies. The data from the first six months of the year suggest a story of anemic, though positive, economic growth. Many forecasters expect a further deterioration in the months ahead as tariffs work their way through supply chains and stricter immigration policies take a toll on industries that rely on foreign-born workers.

Key Takeaways:

• The US economy grew at a 3 percent annual rate in the second quarter, but this figure was skewed by trade and inventory swings caused by President Trump's tariff policies.
• Consumer spending, a bedrock of the US economy, grew at a 1.4 percent annual rate in the second quarter, well below the 2.8 percent growth in 2024.
• High interest rates are weighing on the housing sector, which contracted for the second straight quarter, and may lead to a soft patch in the economy.
• The taxes-and-spending bill passed by Congress could provide a short-term boost to economic activity, but many budget experts warn that it could pose a long-term risk by adding trillions to the federal debt.
• Economists at Morgan Stanley and the Brookings Institution expect the economy to continue growing, but at a slower pace, and believe that tariffs and uncertainty have already had an impact on consumer spending.
• The Federal Reserve will consider the economic data when making their decision on interest rates, with some expecting a rate cut in the fall if inflation remains tame and consumer spending continues to slow.

Statistics:

• GDP grew at a 3 percent annual rate in the second quarter, topping forecasters' expectations.
• Consumer spending grew at a 1.4 percent annual rate in the second quarter, well below the 2.8 percent growth in 2024.
• Inflation cooled, with consumer prices rising at a 2.1 percent rate in the second quarter, barely above the Fed's long-term target of 2 percent.
• After-tax incomes, adjusted for inflation, grew at a 3 percent rate, suggesting that the strong job market could allow consumers to continue spending.
• "Core" consumer prices, excluding volatile food and energy categories, rose at a 2.5 percent rate, even without much effect from tariffs.
• Imports subtracted nearly five percentage points from G.D.P. growth in the first quarter, then added more than five points in the second.
• Shifts in inventories offset those swings, but only partly, adding a bit less than three points to first-quarter growth and subtracting a bit more than three points to the second quarter.

Sources:

• The Commerce Department
• Morgan Stanley
• The Brookings Institution
• The Federal Reserve
• Bank of America
• The New York Times