WASHINGTON, July 30 (Reuters) - U.S. economic growth rebounded more than expected in the second quarter, but that measurement grossly overstated the economy's health as declining imports accounted for the bulk of the improvement and domestic demand increased at its slowest pace in 2-1/2 years.
Details of the Commerce Department's advance second-quarter gross domestic product report on Wednesday painted a picture of an economy that was losing steam as businesses and households grappled with uncertainty from President Donald Trump's protectionist trade policy, characterized by sweeping tariffs on imports and delays of higher duties to allow countries to negotiate trade deals with the White House.
Consumer spending, the engine of the economy, grew moderately after almost stalling in the January-March quarter. Business investment in equipment slowed sharply following double-digit growth in the prior quarter. Residential investment, which includes homebuilding and house sales via brokers' commissions, contracted for a second straight quarter.
Though the Trump administration has announced a number of trade deals, economists expected tepid growth in the remaining two quarters of this year, arguing the nation's effective tariff rate was still one of the highest since the 1930s. They noted about 60% of imports remained uncovered by trade agreements.
"The picture is not pretty, an own goal by U.S. policymakers," said Freya Beamish, chief economist at TS Lombard. "An economy that was purring along, defying expectations of a slowdown, has been placed on hold."
GDP increased at a 3.0% annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said. The economy contracted at a 0.5% pace in the January-March quarter, the first GDP decline in three years.
Economists polled by Reuters had forecast GDP rebounding at a 2.4% annualized rate. The economy grew 1.2% in the first half of the year. Economists expected a lackluster second half, which would limit growth to about 1.5% for the full year. That would be down from 2.8% in 2024 and below the 1.8% rate Federal Reserve policymakers view as the non-inflationary growth pace.
The U.S. central bank was expected on Wednesday to keep its benchmark interest rate in the 4.25%-4.50% range, resisting pressure from Trump to lower borrowing costs. The Fed cut rates three times in 2024, with the last move coming in December.
A rush to beat the duties boosted imports in the first quarter, resulting in a record goods trade deficit that weighed on the economy.
That reversed last quarter, with imports declining at a record 30.3% rate. The resulting smaller trade deficit added a record 4.99 percentage points to GDP, more than offsetting a 3.17-percentage-point drag from inventories.
Stocks on Wall Street were higher. The dollar advanced versus a basket of currencies. U.S. Treasury yields rose.
MODERATE CONSUMER SPENDING
Trade and inventories are the most volatile components of GDP. Consumer spending, which accounts for more than two-thirds of economic activity, increased at a 1.4% pace after rising at a 0.5% rate in the January-March quarter.
Spending was lifted by motor vehicles, likely reflecting pre-emptive buying ahead of import duties. There were also increases in spending on healthcare as well as at restaurants, bars, hotels, and motels.
With the labor market slowing amid hesitancy by businesses to increase headcount, consumer spending could be sluggish for the remainder of the year. Higher prices from tariffs, which started showing in the June consumer inflation data, could also hamper consumer spending.
Middle- and higher-income households have largely been driving spending. Economists say low-income consumers, already disproportionately affected by higher interest rates and slowing wage growth, would be the hardest hit by tariffs.
They also noted the One Big Beautiful Bill's tax cuts and spending provisions would not benefit lower-income households.
The nonpartisan Congressional Budget Office has estimated the bill will add $3.4 trillion to the nation's $36.2-trillion debt and only raise inflation-adjusted GDP by an average of 0.5% over 10 years. But pressures are also building up for middle- and higher-income households.
"Now that delinquencies are starting to rise for upper-income consumers, we expect consumer spending to moderate further in the coming quarters," said Jeffrey Roach, chief economist at LPL Financial.
Business spending on equipment grew at a 4.8% rate, slowing from the first quarter's robust 23.7% pace. Spending on structures such as factories declined for a second straight quarter. Residential investment contracted at a 4.6% rate, the most since the fourth quarter of 2022, amid high mortgage rates.
Federal government spending fell for the second consecutive quarter. The trend is likely to persist amid deep spending cuts on programs outside defense and immigration enforcement.
Final sales to private domestic purchasers, which exclude trade, inventories, and government, and are viewed by economists and policymakers alike as a barometer of underlying economic growth, grew at a 1.2% rate. That was the slowest increase in domestic demand since the fourth quarter of 2022 and followed a 1.9% growth rate in the first quarter.
"These numbers show an economy that has weakened considerably," said Eugenio Aleman, chief economist at Raymond James.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci, Rod Nickel
