US Economy Notches Fastest Growth Pace in Nearly Two Years in Second Quarter

  • The U.S. economy grew faster than previously estimated in the second quarter amid strong consumer spending and business investment, though momentum appears to be slowing as the effects of tariffs and policy uncertainty start to filter through.
  • The quickest growth pace in nearly two years reported by the Commerce Department on Thursday also reflected a sharp contraction in the trade deficit as the flood of imports slowed. The economy's resilience was underscored by other data showing strong demand by businesses for equipment in August. The demand was driven by an artificial intelligence (AI) spending boom, and a drop in first-time applications for state unemployment benefits last week as companies hoard workers.
  • The data at face value suggested further interest rate cuts from the Federal Reserve were probably unwarranted. Tepid hiring blamed by economists on President Donald Trump's import duties and an immigration crackdown caused job growth to almost stall in the three months through August, prompting the U.S. central bank to resume its policy easing last week.
  • Gross domestic product increased at an upwardly revised 3.8% annualised rate last quarter, the fastest pace since the third quarter of 2023, the Commerce Department's Bureau of Economic Analysis said in its third GDP estimate. The economy was previously reported to have grown at a 3.3% pace in the second quarter. Economists polled by Reuters had expected GDP growth to be unrevised.
  • A sharp narrowing of the trade deficit as imports collapsed after a record surge in the January-March quarter was the main driver of the rebound in GDP last quarter. The smaller trade deficit added a record 4.83 percentage points (pp) to GDP growth after slicing off 4.68pp in the first quarter.
  • Imports surged in the January-March quarter as businesses rushed to beat the duties, which boosted the nation's average tariff rate to its highest level in a century. Both the first- and second-quarter GDP readings are not a true reflection of the economy's health because of the wild swings in imports.
  • Trade could add to GDP growth in the third quarter. A separate report from the Commerce Department's Census Bureau showed the goods trade deficit contracted 16.8% to $85.5 billion in August as imports plunged.
  • Economists are bracing for lacklustre growth in the second half of the year because of the lingering drag from trade policy uncertainty as well as mass deportations, which are hampering job growth through reduced labour supply. Growth estimates for the third quarter are converging around a 2.5% rate.

(Source: Reuters)