Trade Swing Supercharges GDP—but Underlying Demand Points to Slower H2

The U.S. expansion just clocked its fastest pace in nearly two years, with second-quarter GDP revised up to a 3.8% annualized rate as resilient consumers and AI-driven business investment offset growing policy crosswinds. A sharp narrowing of the trade deficit, after a flood of tariff-front-loaded imports earlier in the year, added outsized lift to headline growth. Fresh figures also showed core capex demand holding up into August and initial jobless claims slipping to 218,000, reinforcing a picture of firms hoarding labor even as uncertainty builds.

Beneath the glossy top-line, the drivers remain unusually volatile. Imports first surged to beat tariffs, then collapsed, swinging trade from a record drag to a record boost and flattering the quarter’s print. That distortion, alongside only gradual pass-through of tariff costs and a modest inventory draw, suggests underlying momentum is cooler than GDP implies. Still, AI infrastructure outlays and firmer spending on services show the private economy continues to adapt, even as rate-cut expectations recalibrate after last week’s 25 bp move.

• GDP revised to 3.8% (fastest since 3Q23) on stronger consumption and investment
• Trade swing added a record ~4.8 ppt to growth as imports retreated
• Stocks slipped, the dollar firmed, and Treasury yields rose on growth resilience

• Consumer spending now seen up 2.5% (vs. 1.6% prior), led by transportation, finance and insurance
• Business investment: IP products +15.0%; equipment +8.5%; core capital goods orders +0.6% in August
• Initial jobless claims fell 14,000 to 218,000; inventories decreased at a $18.3B rate

• Fed funds lowered to 4.00%–4.25% last week; additional cuts now less certain
• Final sales to private domestic purchasers upgraded to 2.9%, signaling steadier underlying demand
• Growth risks: tariff pass-through, profit-margin compression, and labor-supply constraints from deportations

• GDP’s upward revision to 3.8%—the fastest in nearly two years—indicates the U.S. economy’s resilience, driven by robust consumer spending (now seen up 2.5%) and surging business investment, especially in AI infrastructure and core capital goods.
• The sharp improvement in the trade balance provided significant tailwind, flipping from a major drag earlier in the year to a record boost, while increasing final sales to private domestic purchasers (+2.9%) offers a cleaner signal that underlying demand remains solid even as headline numbers are distorted by tariff-related swings.
• Initial jobless claims continue to fall, and healthy business outlays in intellectual property and equipment investment suggest that firms remain confident enough to both hoard labor and expand, setting the stage for continued private-sector strength if policy conditions remain supportive.
• For asset allocators: The broadening in business spending and healthy services outlays point to sector opportunities beyond just AI; consider tilting toward cyclicals, capital goods, and consumer-facing names poised to benefit from “real economy” momentum and potential for further Fed patience on rates.

• The headline GDP print is flattered by extreme volatility in trade flows—imports surged to front-run tariffs, then collapsed, creating a misleading boost to growth that obscures softer underlying momentum and increases policy risk if the underlying engine stalls.
• Pass-through of tariff costs remains gradual, but profit margins are beginning to feel the squeeze, while firms are drawing down inventories rather than rebuilding—raising red flags for future production and hiring if demand falters or rate cuts stall out.
• Policy uncertainty remains high, with the Fed’s rate cut last week now seen as potentially “one and done” if continued inflation progress is elusive, especially as financial markets have already started to lean against aggressive easing bets after the hot report.
• Labor supply risks—exacerbated by deportations and ongoing policy debates—could constrain further job gains, and core demand may cool as initial tailwinds from inventory and tariff swings abate heading into the second half of the year.
• Action plan for executives and portfolio risk teams: Maintain vigilance on pricing power, margin compression, and inventory dynamics; be ready to shift capital or hiring if incoming data suggest a sharper deceleration in growth as tail-end momentum from Q2 fades into H2 2025.

The composition of growth improved: services outlays firmed and business spending broadened beyond headline AI narratives. Upward revisions to intellectual-property investment and equipment point to a still-healthy capex drumbeat, while inventories subtracted as firms sold pre-tariff stockpiles. The cleaner gauge of private demand—final sales to private domestic purchasers—accelerated to 2.9%, tempering fears that the economy’s engine was sputtering beneath the trade noise.

Financial markets read the report as too hot for aggressive easing: equities faded, the dollar advanced and the curve edged higher. With claims drifting lower and margins only beginning to feel tariff pressure, the Fed can stay patient—especially if September data confirm that inflation progress remains bumpy. Forecasters see third-quarter growth settling near the mid-2s, with risks tilted to slower H2 output as policy uncertainty lingers and any squeeze on profits threatens to bleed into hiring.