⬆️ GDP: +3.0% in Q2, 2025
Strong Q2 rebound after a negative 1st quarter, but with plenty of underlying weakness and oddities
GDP growth came in pretty strong this week at +3.0% for Q2, 2025. This was much better than my last forecast (+1.5%) and better than most predictions. I expected a good top-line number, but there’s some interesting stuff going on below the surface (particularly in trade):
Personal consumption, which is about 70% of total GDP, only grew at +1.4% on an annual basis — better than the previous quarter, but weaker than the previous 12 quarter average of +2.5%.
Business investment, which is about 15% of total GDP, grew at +1.9% — a solid number but weaker than expected and much weaker than the +5.0% average over the last 12 quarters.
Residential investment (about 3% of GDP) actually shrank by -4.6%.
Government was mostly flat — Federal government contribution shrank by -3.7% while state and local grew by +3.0%. It will be interesting to see if state and local governments continue to expand as federal investment decreases. Note that federal government spending overall has increased by about $200 billion so far this year, but not all government spending contributes to GDP.
Depending on how you look at trade, imports declined by an incredible 30%, but exports also declined by 1.8%. Net trade (exports minus imports) increased from -$1.3 Tr to -$1.0 Tr. Essentially, the bulk of the GDP’s overall +3% growth came from a reduction in imports.
Other measures of the economy, like GDP excluding government, all showed significant weakness.
Imports, Exports, and Weird Accounting
The odd nature of imports and exports in gross domestic product accounting makes this data confusing to report. Are decreases in a negative number good? Do you use (+) or (-) to show a decrease in negative number?
The classic Econ 101 GDP formula:
Where C = consumption, I = investment, G = government, X = exports, and M = imports. Notice that imports subtract from GDP in normal GDP accounting, which is weird. The general idea here is that GDP measures domestic production. Removing imports from this formula is basically a definitional accounting identity.
Imagine going to a shipyard that unloads imported goods all day and telling a dockworker that “everything you touch is subtracting from our economy!”. This is why I include an alternative measure (GDP + imports) in my chart above.