Weekly Economic Trends and Indicators
The Headlines:
U.S. real gross domestic product (GDP) increased at a 3.0% seasonally adjusted annual rate in the second quarter, according to the Bureau of Economic Analysis (BEA). Real GDP decreased by 0.5% in the first quarter. In the same report, the BEA reported that the personal consumption expenditures (PCE) price index increased by 2.1% in the second quarter, down from 3.7% in the first quarter.
On the same day this report was released, the Federal Reserve voted to keep their policy interest rate unchanged. The target range for the federal funds rate is 4.25% to 4.5%, where it has stood since the last rate cut in December.
The Details:
The big story related to GDP from the last two quarters is the sudden change in imports. In the fourth quarter of 2024, the seasonally adjusted annual rate of imports of goods was $3.69 trillion after adjusting for inflation. This rose to $4.00 trillion in the first quarter and back down to $3.65 trillion in the second quarter. As we noted when discussing first quarter GDP, the spike in first quarter imports was due to businesses pulling forward imports ahead of the anticipated tariffs.
Consumer spending, which makes up nearly 70% of GDP, only rose 1.4%. Together with the first quarter’s 0.5% increase this makes the weakest 6-month period for consumption since the COVID-19 pandemic. The decline in both residential and nonresidential structures accelerated during the quarter, down by 4.6% and 10.3% seasonally adjusted annual rates, respectively. Finally, non-defense federal government spending decreased by 11.2%.
The Context:
If the first quarter GDP report was better than it looked, then the second quarter report is worse than it looks. In both quarters, the overall number was heavily distorted by the unusually large movement in imports. Ignoring the swings in imports and inventories, most other GDP components were nearly flat, with consumption’s 1.4% growth contributing the most to GDP.
In last week’s Federal Reserve vote to keep the federal funds target unchanged, there were two Fed governors who cast dissenting votes. Both voted to decrease the funds rate. While one dissent is not unusual during some of the more difficult votes, we have not seen two governors dissent since 1993. The dissenting votes reflect an increasing concern that the balance of risk is moving more to the downside risk in the labor market and away from the upside risk to inflation.
As if to underscore this increasing concern, Friday’s employment report showed a weaker than expected increase of 73,000 jobs in July and a downward revision of 258,000 jobs for May and June. The 10-year Treasury yield fell 15 basis points to 4.21% by Friday afternoon in response to this news, and according to CME FedWatch, the probability of a September rate cut increased from 37.7% Thursday to 91.5% on Friday. We will take up the implications of the labor data in more detail next week.
Next week: U.S. labor market update
