Back in the spring, the US economy shocked most everyone with a jolt of stronger than expected growth. This was mainly driven by solid consumer spending and a large decrease in imports. That upward revision—from a second-quarter growth rate of 3.3%—up to a 3.8% growth rate is the biggest contributing factor in our updated forecast. This is the strongest rate of expansion in almost two years. In the first quarter of this year, the economy actually shrank by 0.6%. This drop was mostly a result of companies rushing to bring in products before former President Donald Trump’s tariffs went into effect.
With consumer spending, the biggest driver of economic activity a gauge that rose by 2.5% the past year through June. This increase was greater than the previously projected increase of 1.6%. This resilience is a testament to the adaptability of American consumers in a time where tariffs and economic uncertainty abound. Yet in August, retail sales broke out, soaring by 0.6% vs July. This increase was above what the markets were expecting and strengthened the economy.
Even with the rosy growth numbers, mixed signals on the labor market front. In other news, the US economy added 22,000 jobs in August, well below expectations. At the same time, the unemployment rate ticked up from 4.2% to 4.3%. New filings for unemployment insurance fell last week. The drop brings the index to its lowest point since July, indicating a degree of equilibrium returning to the labor market.
The second quarter’s growth can be attributed to a notable decrease in imports, which negatively impact GDP calculations, alongside a boost in consumer spending. The Commerce Department said that this historic mix was the overwhelming force behind the upwardly adjusted growth numbers.
“[It] reflected a decrease in imports, which are a subtraction in the calculation of GDP, and an increase in consumer spending.” – The Commerce Department
Given all of these strides, economic momentum even seems to be holding strong while shouldering multiple and serious policy headwinds. Bill Adams commented on the latest economic data, noting that they are “considerably more upbeat than the droopy August jobs report.” And he went on to argue that the new data should go a long way in easing fears rooted in recent weakness in the labor market.
There was a note of caution from Lydia Boussour on growth paths ahead. She indicated that “with the impact of tariffs and policy uncertainty becoming increasingly visible, slower US growth and higher inflation are still on the horizon.”