The United States economy is expected to post stronger growth in the second quarter of 2025 than previously
estimated, largely driven by higher business investment and an unusually large boost from trade. According to the latest figures from the Bureau of Economic Analysis, inflation-adjusted Gross Domestic Product (GDP) is expected to grow at an annualised rate of 3.30%. This marks a slight improvement on the earlier estimate of 3%, indicating that economic momentum was firmer than initially believed.

A key driver of this revision was business investment, which advanced at a 5.70% pace. This was considerably higher than the 1.90% originally reported and built on a strong performance in the first quarter. The latest update pointed to stronger spending on transportation equipment as well as the most significant expansion in intellectual property products in four years. Such investment trends suggest that firms are continuing to deploy resources into areas that could support long-term growth and competitiveness.

The rebound in the second quarter represented a sharp turnaround from the first quarter, during which GDP contracted for the first time since 2022. That earlier decline was attributed to firms accelerating imports in anticipation of tariff increases, temporarily distorting trade flows. Looking ahead, most forecasts expect economic growth to moderate as both businesses and households adjust to President Donald Trump’s
trade policies and their impact on costs and supply chains.

In addition to GDP, the government tracks gross domestic income (GDI), which captures income earned and expenses incurred in producing goods and services. GDI rose 4.80% in the second quarter, following a weak 0.20% increase in the first. The parallel strength in both GDP and GDI provides a broader confirmation of underlying economic improvement. Financial markets responded modestly to the release. The dollar traded slightly lower, while yields on two-year Treasury securities moved higher. Despite the firmer growth reading,
investors still largely expect the US Federal Reserve (Fed) to deliver a rate cut in the coming month as it balances growth risks with inflationary pressures.

Economists, however, caution that headline GDP figures this year have been distorted by volatile movements in trade and inventories. As a result, more attention has been placed on a narrower indicator: final sales to private domestic purchasers, which reflects household consumption and business investment without the trade swings. This measure increased at a more modest 1.90% pace for a second consecutive quarter,  underscoring steady but subdued underlying demand. Despite rising tariffs and cost pressures filtering into consumer prices, large retailers such as Walmart and Home Depot have expressed confidence in the durability of consumer spending. Their outlook underscores the importance of household demand as a backbone of economic resilience.

The GDP report also reaffirmed that the Fed’s preferred inflation measure, which is the personal consumption
expenditures (PCE) price index excluding food and energy, climbed at a 2.50% rate in the quarter, unchanged from the earlier estimate. Upcoming July PCE data will provide further insight into wage trends and consumer spending at the start of the third quarter.

Speaking at the central bank’s annual symposium in Jackson Hole, Fed Chair, Jerome Powell acknowledged that the inflationary effects of tariffs are now “clearly visible.” Even so, he signalled openness to reducing interest rates in September, citing concerns that trade uncertainty and rising costs could ultimately weaken the labour market.

US GDP revised estimates

Bottom Line

The US economy seems to be enjoying a sweet spot between looser fiscal and monetary narratives where scaling back spending has been substituted with talk of increased spending and where monetary policy direction have turned more dovish. These factors are beneficial for the broader sentiments, but we remain cautious of the longer-term impact, as well mindful that these narratives have been changing quickly in recent years.

Macroeconomics in brief