U.S. economy is growing, but momentum may not last

U.S. Q2 economic growth is expected to appear strong, but economists warn the figures are likely inflated by tariff-related trade distortions, specifically a surge in exports and a reduction in imports due to pre-tariff stocking. Underlying economic activity shows signs of weakness, with consumer spending having flatlined since December and businesses delaying investments amid policy uncertainty. This suggests a less robust picture than headline GDP indicates, influencing the Federal Reserve's cautious stance on further interest rate cuts.

Analysis

Headline U.S. economic growth for the second quarter is expected to present a deceptively strong picture, primarily due to significant distortions from trade policy. Economists caution that a sharp decline in imports and a corresponding surge in exports, driven by businesses stocking up ahead of threatened tariffs, will artificially inflate the GDP calculation. However, underlying economic indicators point to considerable weakness. Consumer spending, the engine of nearly 70% of the economy, has reportedly "flatlined" since December, with data showing a slowdown in vehicle purchases and restaurant spending. Concurrently, businesses are postponing investment and hiring decisions amid heightened uncertainty over trade and other emerging policies. While the unemployment rate remains low at 4.1 percent, recent data for June indicated a slowdown in job postings and hiring. The expert consensus suggests that averaging first and second-quarter performance reveals a "disappointing" growth pace, well below that of previous years. This environment of conflicting signals has led the Federal Reserve to adopt a cautious stance, holding interest rates steady as it awaits clearer data on how these policies will ultimately impact inflation and employment.

Key Decisions for Investors

• Investors should discount the headline Q2 GDP figure, as it is skewed by trade distortions, and instead focus on underlying indicators such as consumer spending and business investment for a true assessment of economic health.
• The reported flatlining of consumer spending and delayed business investment suggests caution is warranted for sectors highly sensitive to the economic cycle, such as consumer discretionary and industrials.
• Closely monitor Federal Reserve communications for shifts in its assessment of inflation and employment, as its policy decisions will be driven by these core trends rather than the misleading top-line growth number.