Lindsay James, investment strategist at Quilter, has shared her thoughts on the latest US GDP figures.
On the surface, the US economy appears as if it has bounced back from a difficult first quarter, avoided recession and is back on the accelerator. The second quarter reading came in at an annualised rate of 3.0%, well above expectations and will likely result in Donald Trump feeling vindicated for his policy decisions thus far. Core PCE inflation data, a key indicator, came in slightly higher than expected at 2.5%, but also continues to show a disinflationary pattern. However, today’s figures are heavily distorted by the impact of tariffs. Businesses raced to import goods in the first quarter before tariffs could push up their prices, depressing GDP growth which declined 0.5% – higher imports are negative for GDP, hence the fall in Q1.
In the second quarter, businesses had built up large stockpiles of imported goods and so imports fell sharply, leading to higher GDP as a result. Both quarters have been distorted; one on the low side and one on the high side and as such it is clouding what is really happening in the US economy. Averaging the two gives a clearer picture of the underlying run rate, which gives a picture of an economy that has slowed under the headwinds of policy uncertainty and rising costs.
Remarkably, and despite this, the labour market is holding up well with consumer confidence continuing to recover since its post-Liberation Day dip. However, with tariffs still a threat to the future path of inflation, despite the recent run of CPI coming in lower than expected, and an economy that remains to hold up against all the pressures it faces, the Federal Reserve is likely to continue to resist pressure to cut interest rates until there is a greater clarity about how shifting global trade dynamics will ultimately impact consumers wallets. Until the economy obviously rolls over and struggles, Trump will be left waiting for his long desired interest rate cuts.
