By Lucia Mutikani
WASHINGTON (Reuters) -U.S. economic growth likely rebounded in the second quarter as the flow of imports subsided, but with consumer spending anticipated to have increased moderately and business investment in equipment stalled that would grossly exaggerate the economy’s health.
The Commerce Department’s advance gross domestic product report on Wednesday would be heavily distorted by trade as was the case in the January-March quarter when GDP contracted for the first time in three years. Economists said President Donald Trump’s protectionist trade policy, including sweeping tariffs on imports as well as delaying higher duties, had made it difficult to get a clear pulse on the economy.
They urged focusing on final sales to private domestic purchasers, viewed by economists and policymakers alike as a barometer of underlying U.S. economic growth, which is forecast to have slowed from the first quarter’s moderate growth pace.
“For the second quarter in a row, the headline GDP figures are not going to offer an accurate view of the underlying picture,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. “The ripple effects from the Trump administration’s unpredictable tariffs strategy spread widely through the economy. The primary impact was to create caution in the corporate community.”
A Reuters survey of economists forecast GDP likely increased at a 2.4% annualized rate last quarter after declining at a 0.5% pace in the first quarter. The size of the economy is also expected to swell above $30 trillion for the first time ever before accounting for inflation.
The survey was, however, concluded before data on Tuesday showed the goods trade deficit shrinking to its smallest in nearly two years in June and inventories rising marginally. That prompted economists to upgrade their GDP growth estimates by as much as 0.8 percentage point to as high as a 3.3% pace.
Trade chopped off a record 4.61 percentage points from GDP in the first quarter. Though a reversal is expected, some of the boost could be offset by low inventories, the result of the ebb in the flow of foreign merchandise. Trade and inventories are the most volatile components of GDP. Inventories added 2.59 percentage points to GDP in the January-March quarter.
Economists estimated the economy grew less than 1.5% in the first half of the year. They anticipated a lackluster second half, which would limit growth to around 1.5% or even less for the full year, a sharp slowdown from the 2.8% notched in 2024.
Though the White House has announced a number of trade agreements, economists said the nation’s effective tariff rate remained one of the highest since the 1930s and noted that about 60% of the nation’s imports remained uncovered by a deal.
LABOR MARKET KEY
“The economy is not going to be able to close the gap relative to what we saw last year when it comes to GDP growth, because the tariffs are going to … start showing up in the inflation numbers and hurt real disposable income, so consumers aren’t going to be spending as aggressively as they have in the past,” said Ryan Sweet, chief economist at Oxford Economics.
Economists expect the Federal Reserve will keep its benchmark interest rate in the 4.25%-4.50% range after the end of a two-day policy meeting on Wednesday, resisting pressure from Trump to lower borrowing costs. The Fed cut rates three times in 2024, with the last move coming in December.
“The key is the job market. As long as layoffs don’t rise significantly, then the economy will be able to continue to muddle through the second half of this year and there’s not a lot of urgency for the Fed to start cutting interest rates,” said Sweet. “The next rate cut occurs in December.”
Consumer spending, which accounts for more than two-thirds of the economy, was forecast to have picked up, though moderately after nearly stalling in the first quarter. Business spending on equipment was estimated to have been tepid or even declined.
A rebound was expected in government spending, though that is likely to be limited this year by ongoing cuts in some areas. Final sales to private domestic purchasers, which exclude trade, inventories and government spending, were forecast to have moderated from the first quarter’s 1.9% growth pace.
Though the passage of the One Big Beautiful Bill removed fiscal policy uncertainty, the nonpartisan Congressional Budget Office has estimated its tax cuts and spending provisions would add $3.4 trillion to the nation’s $36.2 trillion debt and only raise inflation-adjusted GDP by an average of 0.5% over 10 years. Economists worried the White House’s immigration crackdown could stunt growth through loss of productivity.
“Hopefully productivity goes up because of AI and other kind of things,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University.
“But labor force growth is slowing, in part, due to the disruption in immigration and with fewer people joining the labor force, economic growth will slow and productivity alone is not going to support economic growth.”
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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