American economy rebounds in second quarter

The United States economy expanded at a surprising three per cent annual pace in the April-June period, bouncing back at least temporarily from a first-quarter drop that reflected disruptions from the US trade wars.

Still, details of the report suggested that US consumers and businesses are wary about the economic uncertainty arising from the Trump administration’s radical campaign to restructure the American economy by slapping big taxes – tariffs – on imports from around the world.

“Headline numbers are hiding the economy’s true performance, which is slowing as tariffs take a bite out of activity,” Nationwide chief economist Kathy Bostjancic wrote.

America gross domestic product – the nation’s output of goods and services – rebounded after falling at a 0.5 per cent clip from January through March, the US Commerce Department reported Wednesday. The first-quarter drop, the first retreat of the US economy in three years, was mainly caused by a surge in imports – which are subtracted from GDP – as businesses scrambled to bring in foreign goods ahead of Trump’s tariffs.

The bounce back was expected but its strength was a surprise: Economists had forecast two per cent growth from April through June.

From April through June, a drop in imports – the biggest since the COVID-19 outbreak – added more than five percentage points to growth. Consumer spending registered lacklustre growth of 1.4 per cent, though it was an improvement over the first quarter’s 0.5 per cent.

Private investment fell at a 15.6 per cent annual pace, biggest drop since COVID-19 slammed the economy. A drop in inventories – as businesses worked down goods they’d stockpiled in the first quarter – shaved 3.2 percentage points off second-quarter growth.

A category within the GDP data that measures the economy’s underlying strength weakened in the second quarter, expanding at a 1.2 per cent annual pace, down from 1.9 per cent from January-March and the weakest since the end of 2022. This category includes consumer spending and private investment but excludes volatile items like exports, inventories and government spending.

Federal government spending and investment fell at a 3.7 per cent annual rate on top of a 4.6 per cent drop in the first quarter.

Wednesday’s GDP report showed inflationary pressure easing in the second quarter. The US Federal Reserve’s favoured inflation gauge – the PCE or personal consumption expenditures price index – rose at an annual rate of 2.1 per cent in the second quarter, down from 3.7 per cent in the first. Stripping out volatile food and energy prices, core PCE inflation rose 2.5 per cent, down from 3.5 per cent in the first quarter.

President Donald Trump sees tariffs as a way to protect American industry, lure factories back to the United States and help pay for the massive tax cuts he signed into law July 4.

But mainstream economists – viewed with disdain by Trump and his advisers – say that his tariffs will damage the economy, raising costs and making protected US companies less efficient. They note that tariffs are paid by importers in the United States, who try to pass along the cost to their customers via higher prices. Therefore, tariffs can be inflationary – but their impact so far has been modest.

AP