Under the surface of the most recent GDP report

The Commerce Department’s third estimate put Q2 GDP growth at 3.8% annualized, up from the prior 3.3% estimate and above the consensus forecast of 3.3%. This is the fastest pace since Q3 2023 (+4.9%). The revision was driven by stronger consumer spending (+3.0% vs. +2.7% prior) and a bigger drop in imports (-12.0% vs. -10.3% prior). Q1 2025 was revised down to -0.6%, confirming a contraction. Business investment dipped (-0.2%), hinting at softness ahead, but overall the report highlights economic resilience despite tariffs, policy uncertainty, and cooling trade. The Fed now has more room to consider a “soft landing” as it weighs an October rate cut.

• The economy grew faster than anyone expected
• Consumers are still the main driver of growth
• Tariff-related fall in imports boosted GDP on paper
• Business investment is slowing, which could be a warning sign
• Strong growth gives the Fed cover to be patient on rate cuts
  
  

Sticky inflation

The latest data showed headline PCE up 0.3% in August and 2.7% year-over-year, slightly higher than July’s 2.6%. Core PCE, the Fed’s preferred gauge excluding food and energy, rose 0.2% month-over-month and 2.9% year-over-year, right in line with forecasts. CPI data earlier this month confirmed a 0.4% monthly rise and 2.9% annual gain. Inflation is stable but still above the Fed’s 2% target, keeping alive the “sticky” narrative. Markets are pricing in about a 90% chance of a 25 bps cut in October, but the Fed is unlikely to rush, given that services and shelter costs remain elevated.

• Prices are still rising more than the Fed would be comfortable with
• That said, the recent rise in the rate of inflation seems to have slowed
• “Sticky” areas like shelter and services are keeping pressure on
• Markets expect a small October cut, but big moves are unlikely
  
  

Consumer spending a key driver

Personal consumption expenditures rose $129.2B in August (+0.6% month-over-month), stronger than the 0.5% forecast. Adjusted for inflation, real PCE grew 0.3%, with services up 0.2% and goods up 0.7%. Transportation (+0.4%) and dining/hospitality (+0.3%) led the gains. Disposable income grew 0.4% even as wage growth slowed to 0.3%, giving households enough room to keep spending. This resilience contributed +2.9% to Q2 GDP but also risks keeping inflation sticky. For the Fed, strong consumption complicates the path of rate cuts.

• Consumers keep spending despite higher prices
• Services like travel and dining are leading the way
• Rising income (even modestly) is fueling demand
• Strong spending supports growth but makes inflation harder to tame
• Sectors tied to consumers may hold up better than business-driven areas

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