Tariff Shocks and Trade Swings: The Real Drivers of U.S. Growth

U.S. GDP rebounded at a 3.0% annualized rate in Q2, outpacing forecasts but overstating economic health as a sharp drop in imports accounted for most of the gain and core demand weakened to its slowest growth since late 2022.

Consumer spending—the engine driving two‑thirds of output—increased a modest 1.4%, while private domestic purchases, which exclude volatile trade and inventory swings, rose just 1.2%, the weakest pace in 2½ years. Business investment decelerated sharply from double‑digit gains in Q1, and residential investment contracted for a second consecutive quarter amid policy uncertainty and elevated rates.

• Headline GDP lift driven by a 4.99pp boost from reduced imports
• Consumer outlays up 1.4%, private domestic demand at 1.2%
• Equipment spending slowed and housing investment declined again

• Q2 GDP +3.0% vs Q1’s –0.5%; trade and inventories account for mix swings
• Underlying domestic demand growth weakest since Q4 2022
• Tariff-driven uncertainty and high financing costs dampen business planning

• Fed likely to hold rates at 4.25%–4.50% amid mixed growth signals
• September rate‑cut bets hinge on consumer credit trends and spending momentum
• Advances in trade deals could restore import volumes and stabilize GDP swings

• U.S. GDP’s 3.0% annualized growth in Q2 beat expectations, signaling a resilient economy that maintains positive momentum despite global headwinds and domestic policy uncertainty.
• Headline expansion was helped by a sharp reduction in imports—a signal that U.S. producers are capturing more of local demand and inventories are normalizing after last quarter’s drag, potentially setting the stage for future, more organic demand-led growth.
• Consumer spending, while moderate, remains in positive territory (up 1.4%), which is notable given persistent inflation and higher financing costs. This suggests U.S. households are adapting and still supporting the bulk of economic expansion.
• The cooler pace of private domestic demand and business investment could be temporary, especially if clarity on tariffs or rate cuts injects fresh confidence and unlocks pent-up capital expenditure later in the year.
• Markets are digesting a mixed but constructive outlook: rising Treasury yields and a stronger dollar confirm global faith in U.S. economic stability, making the region attractive for both risk and safe-haven allocations.
• With the Fed likely to hold rates steady, investors get more time to assess consumer strength and corporate investment trends, reducing rate-shock risk and enabling an orderly transition if policy pivots in the fall.

• Much of the Q2 GDP gain came from a sharp drop in imports and not from real strength in core domestic demand—private domestic purchases rose just 1.2%, the slowest since late 2022, casting doubt on the headline’s signal value.
• Business investment decelerated sharply from Q1’s double-digit pace, and residential investment contracted for a second quarter, reflecting deep unease among both corporates and households in the face of prolonged policy and tariff uncertainty.
• Consumer spending growth remains modest and vulnerable, with rising rates and persistent inflation raising the risk that any shock—or another uptick in delinquencies—could quickly tip the consumer sector from slow growth to outright contraction.
• The trade- and inventory-driven nature of this quarter’s rebound illustrates the volatility and vulnerability of U.S. growth in the current environment; future swings in imports or inventories could just as easily subtract from GDP, leading to lumpy or unstable quarterly results.
• Tariff-driven uncertainty remains a major weight: with 60% of imports still facing elevated duties, businesses are reluctant to invest or hire, and no relief appears imminent as policy negotiations drag on.
• If consumer credit tightens further and spending momentum fades, the Fed may be forced into a reactive rather than proactive rate-cut posture—potentially too late to prevent a broader downturn as cyclical risks mount into year-end.

The Q2 swing from a record goods‑trade deficit in Q1—where front‑loaded imports and inventory buildups dragged on output—highlights the volatility of external and stockpile effects. U.S. Treasury yields rose and the dollar strengthened as markets balanced stronger headline growth against tepid domestic momentum.

Economists warn that with roughly 60% of imports still subject to elevated tariffs, investment and hiring will remain cautious. As the Fed meets this week, officials are expected to pause on rates, though a dovish shift could emerge later if consumer delinquencies rise and spending cools further.