The point that must appear front and center in any analysis of the second quarter GDP is that it follows a quarter in which GDP shrank at a 0.5 percent annual rate. This drop was driven by unusual factors — most notably a huge surge in imports that subtracted 4.66 percentage points from growth in the quarter. For this reason, most analysts downplayed the negative growth figure reported for the quarter.

However, the reasons that made the first quarter unusual on the negative side will be making the second quarter unusual on the positive side. Most obviously, we can be certain that there will be a big jump in net exports making a large positive contribution to growth in the quarter. Any honest analysis must average the two quarters together.

Weak Growth in the First Half of 2025

We will see growth somewhat over 2.0 percent in the second quarter. This would ordinarily be fine, but when this growth figure is averaged in with the drop of 0.5 percent in the first quarter, it is exceptionally weak. If the second quarter growth is 2.5 percent, it means the economy grew at an average rate of 1.0 percent in the first half of 2025, a sharp slowing from 2.8 percent rate for the full year of 2024.

Productivity Uptick May Be Over

Productivity growth was even more erratic than usual in the pandemic recession and recovery, but it still averaged a strong 1.9 percent over the five years from the fourth quarter of 2019 to the fourth quarter of 2024. Growth fell to just 1.3 percent in the first quarter. The unusual factors affecting GDP growth also affected productivity growth, so this number must be viewed with caution.

However, hours appear to have increased, at close to a 2.0 percent annual rate in the second quarter. If GDP growth falls in the range of 2.0-3.0 percent, this would translate into productivity growth for the quarter of less than 1.0 percent. Coupled with the weak growth for the first quarter, this is enough to raise concerns that we are on a slower productivity growth path. That would likely mean slower real wage growth and higher inflation. But productivity data are erratic, and the revisions are often large, so it’s too early to say anything very conclusive.

Consumption Growth Has Slowed Sharply

Consumption growth slowed in the first quarter to just a 0.5 percent annual rate after growing 3.4 percent in 2024. This slowing didn’t draw as much attention as it ordinarily would because the advance GDP report showed a somewhat stronger 1.8 percent growth rate before it was revised down in subsequent reports.

We will see a somewhat better growth rate for the second quarter, but still under 2.0 percent. Durable goods consumption was still growing rapidly in the quarter, as people seem to be buying in advance of tariffs. Both non-durable consumption and services are growing slowly, at close to a 1.0 percent annual rate. Spending on restaurants and hotels has been especially slow, likely reflecting concerns about the overall state of the economy and personal finances, but it seemed to pick up some in June. Slow growth in non-durables and services is a major drag on GDP growth, since together they account for more than 60 percent of the total economy.

Non-Residential Investment Will Make a Modest Contribution to Growth

In the first quarter, non-residential investment added 1.36 percentage points to the quarter’s growth, driven mostly by a 23.7 percent increase in equipment investment. Part of this rise was just a bounce back from a weak fourth quarter, but part of it was attributable to an effort by businesses to stockpile in advance of tariffs.

Spending on computers and peripheral equipment increased at a 122.4 percent annual rate, adding 0.54 pp to the quarter’s growth. This will not be repeated and will likely be reversed to some extent. But spending on aircraft increased rapidly in the second quarter, which is likely to mean that equipment investment as a whole should still increase in the quarter.

Investment in structures is slowing rapidly, driven by sharp declines in hotel construction and an ending of the factory construction boom. In the first quarter, structure investment subtracted 0.07 pp from GDP. The hit will be twice as large in the second quarter.

Investment in intellectual products will show a small positive as the AI boom outweighs declines in investment in developing drugs and cultural products. This increase, together with the rise in equipment investment, means that investment as a whole will contribute close to 0.4 pp to growth.

Residential Investment Fell Sharply in the Second Quarter

Residential investment was hit by high interest rates and economic uncertainty. It fell at close to a 10 percent annual rate. This will subtract 0.3 pp from the quarter’s growth.

Net Exports Will Be a Big Positive in Second Quarter Growth

Net exports subtracted 4.61 pp from growth in the first quarter, as businesses and households rushed to buy things in advance of Trump’s tariffs. This will be at least partly reversed in the second quarter as the trade deficit goes back to a more normal level.

Net exports should add at least 3.0 pp to growth for the quarter. On the other side, inventories added 2.59 pp to growth in the first quarter, reflecting the surge in imports. They should be a major negative in the second quarter, subtracting at least 2.0 pp from the quarter’s growth.

It will also be interesting to see whether the slide in service exports continues. Service exports fell at a 9.7 percent annual rate in the first quarter, with foreign tourism especially hard hit. It is likely to decline further in the second quarter. Spending by foreign students will also fall, although this will show up more in the third quarter.

Economy Slows as It Shifts Direction

As noted, we are seeing a sharp slowing of growth since 2024. This is showing up most importantly in slower consumption growth, as employment and real wage growth slow sharply. If the slowdown in productivity growth proves to be enduring, then a slower pace of real wage growth seems almost inevitable, unless we see a reversal of the shift from wages to profits in the last quarter century.

While it is easy to identify sectors that have been hurt by the transition in administration policies, it is not clear yet which sectors will be gainers. AI for the moment seems a winner, although that predated the change in administrations and it is not clear the surge in that sector will be enduring. The tariffs have disrupted manufacturing at least as much as they have benefitted it. Apart from some favored contractors, clear winners are hard to find.