The economy grew sturdy 3% in the second quarter as tariffs again skewed the numbers

USA Today

2 days ago

President Donald Trump's global trade war has again distorted the broadest snapshot of the U.S. economy – this time creating a brighter picture.
The economy grew solidly in the second quarter but forecasters traced the showing to the reversal of a tariff-related import surge that caused output to shrink early this year.
Consumer spending and business investment increased modestly and growth is projected to slow further in the second half of the year as more of Trump's import fees filter into retail prices.
The nation's gross domestic product, the value of all goods and services made in the U.S., grew at a seasonally adjusted annual rate of 3% in the April-June period, the Commerce Department said July 30. Economists surveyed by Bloomberg had forecast a 2.4% increase.
But the performance was artificially boosted by a sharp drop in imports, just as the 0.5% decline in GDP the first three months of the year – the economy's first contraction in three years – was rooted in a historic spike in shipments from foreign countries.
With Trump's double-digit tariffs looming, American retailers and manufacturers raced to order foreign goods early in the year before the levies took effect. That led to an unprecedented flood of imports, which must be subtracted from GDP - the goods that consumers, companies and the public sector bought – because they're made overseas.
Since those purchases were pulled forward, companies didn't need to order as many goods from other countries last quarter and imports plunged, reversing the math that dampened output earlier and bolstering U.S. growth.
Is the economy doing well right now?
The bigger picture: Forecasters expect the economy to slow in coming months as Trump's tariffs reignite inflation and sap consumer purchasing power. Economists project growth of less than 1% in both the third and fourth quarters, according to those surveyed by Wolters Kluwer Blue Chip Economic Indicators.
Forecasters predict the Labor Department on Aug. 1 will announce that 109,000 jobs were added in July, according to the median estimate of a Bloomberg survey. That would be down from 147,000 in June and an average of 130,000 so far this year.
Although the White House has struck trade deals in recent weeks with countries such as the United Kingdom, the European Union, Indonesia, Vietnam and Japan, the average US tariff rate still has shot up to about 20% from less than 3% early in the year, Nationwide economist Kathy Bostjancic estimates. That likely will push annual inflation from 2.7% to 3% by year's end, she said. Absent the duties, inflation likely was headed back toward the Federal Reserve's 2% goal, economists figure.
Additional tariffs that further drive up inflation could take effect by a Aug. 1 deadline if administration officials don't reach deals with dozens of countries.
When can we expect the Fed to lower interest rates?
Economists don't expect the GDP report to move the needle on a Federal Reserve decision on interest rates slated to be announced at 2 p.m. ET.
The Fed is expected to hold rates steady for a fifth straight meeting despite persistent pressure from Trump to decrease rates, though futures markets are betting on a mid-September rate cut.
Normally, a sturdy GDP figure might make the Fed even less inclined to lower rates. The Fed shaves rates to support a weak economy and raises rates, or keeps them high longer, to fight inflation. But since the data was again skewed by tariff effects, officials are likely to put less weight on the numbers.
For now, Fed officials are more focused on maintaining their wait-and-see approach to rate reductions as they assess how much the import charges push up inflation in coming months - barring a downturn in the labor market.