gross domestic product growth slower than it appears gross domestic product growth slower than it appears http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\fast-moving-train-small.jpg August 6 2025 August 6 2025

GDP growth slower than it appears

Huge swing in trade in the second quarter skewed the data.
Published August 6 2025
My Content

Bottom line

It turns out the first quarter’s negative gross domestic product (GDP) print was a trade-related hiccup after all, rather than the start of a deep recession, as the second quarter showed stronger-than-expected nominal growth. But the underlying trend is less rosy, as the economy has slowed over the last four quarters when considered collectively.

US GDP rose a better-than-expected 3.0% on a quarter-over-quarter (q/q) annualized pace in the second quarter, compared with the Bloomberg consensus estimate for a 2.6% increase and well above the first quarter’s decline of 0.5%. Growth was 2.4% in last year’s fourth quarter. Our second-quarter estimate here at Federated Hermes was for 2.3%, and the Blue-Chip consensus recently raised its forecast from 1.1% to 2.0%. The Atlanta Fed’s GDPNow estimate declined from 4.7% in early June to 2.9%.

What happened? Tariff derangement syndrome significantly distorted first-quarter GDP, as imports surged by nearly 38% (subtracting almost 5 percentage points from growth), marking the worst damage to GDP from net trade since 1947. At the same time, inventory restocking leapt by more than $160 billion to collectively beat the expected imposition of sharp tariff-related price increases President Trump announced on April 2. But that trend reversed in the second quarter, as imports plunged by more than 30% (adding more than 5 points to growth), while inventories plummeted by $26 billion. 

Personal consumption and corporate spending rose 1.4% and 1.9%, respectively, in the second quarter. But residential construction continued to struggle amid high mortgage rates, record high housing prices and the worst affordability in 40 years — it declined by 4.6% in the second quarter. As a result, private domestic final sales grew by a sluggish 1.2% in the second quarter versus 1.9% in the first. Finally, government consumption rose 0.4% in the second quarter, as a 3.0% increase in state and local spending offset a 3.7% decline in federal spending.

Private domestic final sales slow This metric gauges the underlying fundamental strength of the economy, focusing on the three core elements of GDP growth, which include personal consumption, corporate spending, and residential construction. By design, it excludes volatile inventory liquidation or restocking, net trade and government spending. In the second quarter, this metric grew by only 1.2% q/q (the slowest pace since the fourth quarter of 2022), down from a 1.9% increase in the first quarter, 2.9% in last year’s fourth quarter, and 3.4% in the third quarter of 2024. So, even though President Trump’s tariff-related noise may be in the rearview mirror, core economic growth has clearly decelerated over the past year.

Inflation holds steady The core Personal Consumption Expenditure (PCE) index (the Federal Reserve’s preferred measure of inflation) was unchanged at a growth rate of 2.8% year-over-year (y/y) in June, up from a four-year low of 2.6% in April.

Fed still on the sidelines For its fifth consecutive policy-setting meeting this year, the Fed kept interest rates unchanged, leaving fed funds in a range of 4.25-4.50% last week. But Chair Jerome Powell faced two dissents from the Board of Governors for the first time since 1993. Christopher Waller and Michelle Bowman, both Trump appointees, indicated they preferred a quarter-point cut.

With the economy slowing and the rate of unemployment rising, Waller and Bowman have a point well-taken. The rest of the FOMC is seemingly more concerned that inflation may spike in the coming months due to a lagged impact from Trump’s tariff and immigration policies. For them, maintaining a data-dependent, wait-and-see approach is more prudent. We here at Federated Hermes are still projecting two quarter-point cuts later this year, starting in September.

Details of the second-quarter GDP report

  • Personal consumption (which accounts for nearly 70% of GDP on a chained-dollar basis) rose 1.4% q/q in the second quarter (contributing 0.98 percentage points to the gain in GDP), slightly below the expected consensus increase of 1.5% but nearly triple the 0.5% gain in the first quarter of this year. Retail sales surged by a two-year high of 1.5% m/m in March, as businesses and consumers were motivated to stock up on goods ahead of potentially higher tariff-related prices. With demand sated, nominal retail sales slipped 0.1% month-over-month (m/m) in April and fell 0.9% in May. Sales increased in June by 0.6% m/m and by 3.9% y/y. That’s important because June is the start of the crucial Back-to-School season. We expect this positive trend to continue into July.
  • Corporate non-residential capital spending rose 1.9% q/q in the second quarter (adding 0.27 points to GDP growth), down from a three-year high of 10.3% in the first quarter (adding 1.36 points). Structures plummeted 10.3% for the second consecutive quarter and for the third time in the last four quarters, compared with a 2.4% first-quarter decline. Equipment spending rose 4.8% in the second quarter, compared with a powerful 23.7% first-quarter gain that may have been tariff-related. Intellectual property grew by a solid 6.4% in the second quarter, up from a 6.0% first-quarter increase. With the One Big Beautiful Bill signed into law with a provision for the immediate expensing of capital goods purchases, factory construction and research & development, we expect a surge in capital expenditures in coming quarters. 
  • Residential construction declined for the fourth time in the last five quarters, falling 4.6% q/q in the second quarter (subtracting 0.19 points). That’s the worst period since the fourth quarter of 2022. With the Fed refusing to ease policy, mortgage rates are so high that existing homeowners are reluctant to surrender their lower rates. That has resulted in low inventory and elevated prices. Housing affordability has not been this bleak in 40 years. 
  • Net trade was the star of the second quarter, declining $1.026 trillion (down from a decline of $1.359 trillion in the first quarter), which added 4.99 points to growth, reversing the first-quarter decline of 4.61 points. In the first quarter, businesses and consumers significantly increased their imports to beat potential price increases, which hurt GDP. But they pulled back in the second quarter, boosting growth. As a result, imports plunged by a five-year low of 30.3% q/q in the second quarter (adding 5.18 points), compared with a record surge of 37.9% q/q in the first quarter (subtracting 4.66 points). Exports slipped by 1.8% q/q in the second quarter (subtracting 0.19 points), compared with a modest 0.4% q/q first-quarter increase (adding 0.04 points).
  • Inventories declined by a four-year low of $26 billion in the second quarter (subtracting 3.17 points). But that was in sharp contrast to the first quarter, when inventories soared by a three-year high of $160.5 billion as businesses and consumer bought goods aggressively to beat tariff price hikes (adding 2.59 points).
  • Government spending rose a modest 0.4% q/q in the second quarter (adding 0.08 points), compared with a 0.6% first-quarter decline (subtracting 0.10 points). But federal spending dropped 3.7% q/q in the second quarter, led by an 11.2% decline in non-defense expenditures (subtracting 0.32 points). State and local spending rose 3.0% in the second quarter (adding 0.32 points).

Connect with Phil on LinkedIn

Tags Markets/Economy . Equity .
EXPLORE
EXPLORE
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results. 

This is a marketing communication. The views and opinions contained herein are as of the date indicated above, are those of author(s) noted above, and may not necessarily represent views expressed or reflected in other communications, strategies or products. These views are as of the date indicated above and are subject to change based on market conditions and other factors. The information herein is believed to be reliable, but Federated Hermes and its subsidiaries do not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. 

This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities, related financial instruments or advisory services. Figures, unless otherwise indicated, are sourced from Federated Hermes. Federated Hermes has attempted to ensure the accuracy of the data it is reporting, however, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. The data contained in this document is for informational purposes only, and should not be relied upon to make investment decisions. 

Federated Hermes shall not be liable for any loss or damage resulting from the use of any information contained on this document. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions. 

United Kingdom: For Professional investors only. Distributed in the UK by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is also a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).

European Union: For Professional investors only. Distributed in the EU by Hermes Fund Managers Ireland Limited which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59. 

Australia: This document is for Wholesale Investors only. Distributed by Federated Investors Australia Services Ltd. ACN 161 230 637 (FIAS). HIML does not hold an Australian financial services licence (AFS licence) under the Corporations Act 2001 (Cth) ("Corporations Act"). HIML operates under the relevant class order relief from the Australian Securities and Investments Commission (ASIC) while FIAS holds an AFS licence (Licence Number - 433831).

Japan: This document is for Professional Investors only. Distributed in Japan by Federated Hermes Japan Ltd which is registered as a Financial Instruments Business Operator in Japan (Registration Number: Director General of the Kanto Local Finance Bureau (Kinsho) No. 3327), and conducting the Investment Advisory and Agency Business as defined in Article 28 (3) of the Financial Instruments and Exchange Act (“FIEA”). 

Singapore: This document is for Accredited and Institutional Investors only. Distributed in Singapore by Hermes GPE (Singapore) Pte. Ltd (“HGPE Singapore”). HGPE Singapore is regulated by the Monetary Authority of Singapore. 

United States: This information is being provided by Federated Hermes, Inc., Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, and Federated Investment Management Company, at address 1001 Liberty Avenue, Pittsburgh, PA 15222-3779, Federated Global Investment Management Corp. at address 101 Park Avenue, Suite 4100, New York, New York 10178-0002, and MDT Advisers at address 125 High Street Oliver Street Tower, 21st Floor Boston, Massachusetts 02110.

Issued and approved by Federated Advisory Services Company

4018485231