Driven by a slight rebound in consumer spending and a significant cooling of imports at the beginning of the year, U.S. economic activity rebounded significantly in the second quarter.
Preliminary data released by the U.S. Bureau of Economic Analysis (BEA) on Wednesday showed that the GDP, adjusted for inflation, grew at an annualized rate of 3%, completely reversing the contraction of -0.5% in the first quarter and significantly exceeding the market expectation of 2.6%.
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Simultaneously released data indicated that the annualized quarter-on-quarter core Personal Consumption Expenditures (PCE) price index for the second quarter was initially reported at 2.5%, a significant decrease from the previous value of 3.5%, but higher than the expected 2.3%. The rebound in inflation will make the Federal Reserve more cautious in its interest rate policy.
<h2>Significant Decline in Imports Drives Reversal of GDP Decline in the Second Quarter</h2>
Data shows that the inflation-adjusted real GDP in the U.S. increased significantly in the second quarter, driven by two main forces: first, a significant decline in imports, and second, resilient consumer spending.
According to data released by the U.S. Bureau of Economic Analysis (BEA), the reason for the -0.5% contraction in U.S. GDP in the first quarter was primarily due to a surge in imports, which are considered a &#34;deduction&#34; in GDP accounting. In other words, that round of economic decline was not caused by weak domestic demand, but rather by businesses &#34;rushing to import goods&#34; against a backdrop of stable consumption, resulting in a statistical decline.
In the second quarter, the decline in imports led to a contribution of 5 percentage points from net exports to GDP, which is historically rare.
At the same time, consumer spending grew by 1.4%, slightly below the expected 1.5%, marking the slowest growth in two consecutive quarters. Notably, private domestic final sales, which better reflect domestic demand conditions, only grew by 1.2%, the slowest level since the end of 2022, indicating that the momentum of real demand is marginally weakening.
<h2>Consumption Remains a Key Pillar, Slight Rebound in Automotive and Service Spending</h2>
Although overall consumption growth has slowed, from a structural perspective, durable goods consumption (especially automobiles) has rebounded, and service demand has also shown improvement. Several companies, including Chipotle and United Airlines, mentioned in their earnings reports that the rebound in consumer confidence is driving a recovery in spending.
However, the background for the spending rebound is also related to a stabilizing political environment. The Trump administration recently reached agreements with key trading partners such as the EU and Japan, partially alleviating market concerns about the expansion of tariffs. Companies generally report that perceptions of uncertainty regarding trade policies are decreasing, which helps to warm up investment and consumption.
United Airlines CEO Scott Kirby pointed out in a conference call on July 17: “Clearer policy expectations allow the market and businesses to plan within a smaller range of fluctuations, and this certainty is bringing about a substantial turning point in demand.”
<h2>Declines in Business Investment and Exports, Weakening Real Estate, and Inventory Dragging Growth</h2>
However, the economic recovery is not without concerns. Both corporate investment and exports have declined, reflecting a weakening of some growth momentum in the context of high interest rates and slowing external demand.
In the second quarter, non-residential fixed investment growth fell to 1.9%, far below the peak in the first quarter. Although Trump signed a budget bill this month that makes the 2017 tax reform permanent and retains incentives for corporate investment, corporate spending enthusiasm has clearly cooled.
Real estate remains one of the biggest drags on the economy. Residential investment fell at an annualized rate of 4.6%, marking the worst performance since 2022. In a high-interest-rate environment, both homebuyers and developers are waiting for cheaper financing conditions, while the spring sales season recorded the worst results in 13 years.
At the same time, changes in inventory contributed a negative drag of 3.17 percentage points to GDP, the largest since 2020. This change reflects the inventory backlog caused by companies stockpiling at the beginning of the year, which was gradually cleared in the second quarter.
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<h2>Behind the data, is it recovery or illusion?</h2>
On the surface, the strong economic growth in the U.S. in the second quarter is enough to crush the pessimistic expectations of &#34;falling into recession&#34;; however, a deeper dive into the data reveals that the triple concerns of cooling domestic demand, rebounding inflation, and weak investment have not been eliminated.
As one market analyst said: &#34;This is data that looks 'very strong', but it could also be an illusion under trade noise.&#34;
Key indicators such as consumer spending, inflation, and non-farm employment will be released next, further revealing the underlying momentum of the economy.
For the Federal Reserve, stronger-than-expected GDP data, while increasing the probability of a &#34;soft landing,&#34; also weakens the rationale for rapid interest rate cuts this year. Analysts generally expect the Federal Reserve to maintain interest rates this week, waiting for more data to validate economic trends

After excluding inflation factors, GDP grew at an annualized rate of 3%, not only completely reversing the contraction in the first quarter (-0.5%) but also significantly exceeding the market expectation of 2.6%. This was mainly driven by two forces: a significant decline in imports and resilient consumer spending

- U.S. economic activity rebounded significantly in the second quarter, driven by a slight increase in consumer spending and a sharp decline in imports following early-year foreign goods purchases.  
- The Bureau of Economic Analysis (BEA) reported a 3% annualized GDP growth, recovering from a 0.5% contraction in the previous quarter and surpassing the expected 2.6% growth.  
- Consumer spending, which accounts for about two-thirds of GDP, rose by 1.4%, while business investment growth slowed, and the core personal consumption expenditures price index increased by 2.5%.

The actual GDP annualized quarter-on-quarter preliminary value for the U.S. in Q2 is 3%, better than expected, and the PCE price index is 2.5%