US economy grows at fastest pace in nearly two years as spending roars back
Second-quarter GDP revised to 3.8% on brisk consumer spending and equipment investment; trade deficit narrows as imports slow, but policy uncertainty looms over the outlook
The U.S. economy expanded at a 3.8% annualized rate in the April-June quarter, the fastest pace in nearly two years, according to the Commerce Department’s Bureau of Economic Analysis. The upgrade from 3.3% reflected stronger consumer spending and a rebound in business investment, while a sharp contraction in imports lifted overall growth. The revision underscores resilience in the face of ongoing trade policy uncertainty and weaker hiring early in the year.
Consumption rose at a 2.5% pace in the second quarter, up from 1.6% in the previous estimate, with spending driven by services and durable goods. Business investment in equipment accelerated, with the IP-intensive segment expanding notably; intellectual property products were revised higher to a 15.0% rate, and spending on equipment was revised up to an 8.5% growth pace. Final sales to private domestic purchasers, a measure economists watch as a gauge of underlying momentum, rose to a 2.9% rate in Q2. The trade deficit swung lower, and the reduction in imports added a record 4.83 percentage points to GDP growth.
The strength in Q2 came after a drag from the prior quarter when a front-loading of imports—part of a response to anticipated tariffs—cropped up, contributing to a weaker January-March performance. As imports cooled in the spring, the pace of GDP rebounded. Economists noted that swings in inventories and imports can heavily color quarterly readings, complicating assessments of underlying momentum. Overall, the economy was previously reported to have grown 2.8% in 2024, a context in which the Q2 pickup stands out.
Beyond the GDP figures, other data across the summer showed mixed signals for the labor market even as consumer activity held up. Retail sales rose 0.6% in August, signaling ongoing demand from households. The unemployment rate ticked up to 4.3% in August, and initial jobless claims fell to the lowest levels since July, a sign that some slack in the labor market remained muted even as hiring cooled. Analysts noted that the recent GDP and claims data could ease fears sparked by a weak August jobs report, though they warned that policy uncertainty and tariff-related effects could cap payrolls going forward. The Federal Reserve had resumed rate cuts last week, but investors and economists said the stronger GDP read could temper expectations for further easing in the near term.
Economists cautioned that the boost from the second quarter may not extend into the second half of the year. Many expect more modest growth around 1.5% for the year as the effects of tariffs and immigration policy uncertainty filter through the economy. Still, the consumer has remained a relatively steady engine, and firms have continued to invest in equipment and technology despite policy headwinds. The quarterly revision and the accompanying data highlight how shifts in imports, spending, and investment can drive pronounced swings in reported growth, even as the broader picture remains one of a resilient, if imperfect, expansion.
Christopher Rupkey, chief economist at FWDBONDS, said that the current level of Fed interest rates appears not to be slowing the economy or the labor market. He attributed any potential softness in hiring to policy changes rather than to fundamental economic weakness. Bill Adams, chief economist for Comerica Bank, said the latest GDP and jobless claims data should help ease anxiety from the August payroll report. Lydia Boussour, senior economist at EY-Parthenon, cautioned that tariffs and broader policy uncertainty could weigh on growth if they persist or broaden, even as current momentum keeps the economy on a path of expansion in the near term.
The latest government data align with a broader view that the United States is navigating a period of policy risk while benefiting from resilient consumer demand and ongoing business investment. As the gap between imports and exports continues to swing, the path for growth in the second half of 2025 will likely hinge on how trade policy evolves and how labor-market dynamics adapt to that evolving landscape.
