Government consumption and inventories were a bigger drag though. All adjusted for inflation.
By Wolf Richter for WOLF STREET.
Back on July 30, the “advance estimate” of GDP for the second quarter showed 3.0% growth, held down by anemic consumer spending growth and plunging inventories. The “second estimate,” released on August 28, revised GDP growth for Q2 higher to 3.3%.
Today, the “third estimate” of Q2 GDP revised Q2 GDP growth to 3.8%, the fastest growth since Q3 2023, driven largely by a big up-revision of consumer spending. This 3.8% rate of growth is in the hot zone for the US, whose average GDP growth over the past 10 years is just over 2%. All growth figures are adjusted for inflation.
The “first estimate” of GDP growth is the one that gets all the attention in the media. The revisions are normally not the focus of any attention. For that reason, I will compare today’s “third estimate” to the “first estimate,” in part because the up-revisions were so big and cumulative.
Consumer spending growth was revised up to +2.5% in Q2. The first estimate had pegged consumer spending growth at a worrisomely anemic 1.4%, the second estimate at 1.6%. Today’s massive up-revision to +2.5%, nearly doubling the growth rate of the first estimate, was the biggest contributor to the up-revision of overall GDP growth (all adjusted for inflation).
This 2.5% is healthy growth in consumer spending. The red line shows the annualized consumer spending in 2017 dollars (right scale). The blue columns show the growth rate in percent (left scale).
Private fixed investment was revised to a growth rate of 4.4%, from the dreadfully anemic 0.4% in the first estimate. Today’s up-revision substantially contributed to the up-revision of overall GDP growth:
- Investment in equipment was revised up to +8.5%
- Investment in intellectual property was revised up to +15.0%.
- Investment in structures had plunged by 10.3% in the first estimate. This plunge was reduced to -7.5% today.
But residential fixed investment (such as construction of single-family and multifamily homes) was pegged in the first estimate at a drop of -4.6%; this drop increased to -5.1% in today’s third estimate, and lowered the up-revision of private fixed investment.
Revisions that pushed the other way v. first estimate:
Net exports (exports minus imports) were revised lower, they worsened:
- Imports plunged a little less (-29.3%) than the first estimate (-30.3%); imports subtract from GDP.
- Exports fell by 1.8%, same rate as the first estimate. Exports add to GDP.
Government consumption shrank by 0.1% (federal, state, and local governments combined), compared to growth of 0.4% in the first estimate.
The plunge in private inventories worsened, and deducted 3.44 percentage points from GDP growth, versus 3.17 percentage points in the first estimate. Inventories had soared in Q1 on tariff-frontrunning, and in Q2 they undid some of that increase.
What slowdown?
The strong Q2 growth came after the explosion of imports on tariff-frontrunning had knocked Q1 GDP growth into the negative (-0.6%). Consumer spending growth in Q1 was also weak. So there were a lot of concerns about growth. And the first estimate of Q2 consumer spending growth (+1.4%) did nothing to alleviate those concerns.
But the revised Q2 growth figures, especially the up-revisions of consumer spending back into the healthy range, should relieve those anxieties.
And Q3 consumer spending so far looks pretty good, as indicated by strong retail sales in July and August. So maybe the wait for the downward spiral of the economy – despite reduced government spending – may have to be extended a little further?
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So everything is “fixed” then? LOL!
With the eCONomy doing so well, I am sure the government will have more than enough revenues to cover their expenses.
The tragedy is that despite pretty strong economic growth over the past few years, the deficits of the federal government have been huge. What’s going to happen to those deficits when there is a recession? They’re going to totally blow out.
Along with yields
Doesn’t this mean the FED will do anything it can to avoid recession? With the FED bailing out every negative consequence of its own policy choices, can asset prices ever come down?
Feels like the only thing that will stop this train is a prolonged recession with no FED interference/bailouts.
If there is a recession, the Fed will cut rates some, and the recession will go away — likely on its own, even without rate cuts.
Was it Yellen who said there won’t be anymore recessions? Or am I mistaken?
Yes, you’re mistaken. She didn’t say that.
What she said in 2017 was that “another financial crisis” was unlikely in “our lifetimes” due to stronger banking regulations and improved risk management, but can’t be entirely ruled out.
A “financial crisis” is very different from a “recession.” Recessions are routine, and the US has had many of them.
Inflation is going up, right? Ha Nvda is buying its own chips via liquidity drop in open AI. That can’t be good for long term growth. The global Credit bubble is at risk, is the default answer for the crash. I know nothing
You can’t collect taxes and pump consumer spending at the same time 😂
Wolf,
recent comment from Trump. We are going to bail out farmers since China is not buying soybean and corn. I am curious to get your opinion since you were very vocal when it came to past bailouts. It all ties down to we continue to go down rabbit hole of government spending. entire planet experienced COVID. How many developed countries stacked up so much debt like we did in last 5 years?
The farmers always get money from the government, even now, and have forever. They get money for growing cops, they get money for not growing crops, they get money for this that and the other. The farm lobby may be the most powerful lobby in the US, and it keeps pushing for more money to the farmers. Always. No one has been willing or able to shut it down.
Yes, farmers always get a bailout. People get cranky when there is no food. Nothing gets a politician killed faster than a starving population. The farmers have the second strongest lobby, right behind AIPAC.
Except noone is going hungry. We are growing TOO much food. Farmers are given money and money is sucked out of system by parasitic corps like John Deere Monsanto and various water system companies to allow more efficient farming. All so we can grow more food than we can sell which collapses the prices thus requiring more government bailouts.
Genius! Swamp drained.
That’s already starting to happen in Canada and it’s not going to be pretty.
“Strong economic growth”.
You’re just misclassifying inflation as growth.
Ctrl + F “adjusted for inflation”
The article tells you.
As I said – they’re misclassifying inflation as growth. “Adjusting for inflation” using the government’s CPI measure of inflation is worthless.
Andrew
They don’t use CPI to adjust GDP and its components to inflation. They use the GDP deflator.
Found one
I was looking at old data of government spending in previous recessions and what we the government has done during end of trump first term and Biden 4 years is off the charts literally. We pumped money equivalent to 4 previous recessions and 2020 recession lasted for only few months. We added 4 trillion debt just in 2020 year which was last year of trump term and then Biden double dipped on it. No wonder we are not going to see any recession.
Ten year back up to 4.2% today. The economy (and inflation expectations) are hotter than thought. Maybe the cut was a one and done.
MW: “Economists predict significant Q4 slowdown due to Trump tariffs on Pumpkin Spice”
LOL, they already predicted a “significant slowdown due to Trump tariffs” for Q2 (see above for how that turned out), and for Q3 (looking good so far), and having failed in their predictions due to their inbred anti-tariff BS, they now shift the slowdown out again. These same morons have been predicting a recession ever since the Fed started hiking interest rates in 2022. They have been wrong for three years straight. There people are braindead. Maybe someday they’ll get their recession.
But why does anyone still pay attention to their prediction-BS? I tell you why: The clickbait media, such as MarketWatch, make money pushing out stupid headlines because people love to spread stupid headlines across the internet. I’m afraid brains have turned to mush, starting with the brains of economists and reporters in the media. I hope they will be replaced by AI — and probably have already been replaced by AI. At least, AI is cheaper and no worse.
The whole adjustments/revisions saga brings up the question of how the GDP is calculated. Not on the basis of exports/imports, investments…, but how the data is collected and evaluated to arrive at the number. The inflation deflator is another yet can of worms.
You can study this for years. GDP is a huge, gigantic, complex data base whose data are collected from ALL sources, including administrative sources, such as the IRS, import and export data from ports, etc. A lot of this data takes a while to accumulate, such as IRS data, and when it become available, the prior estimates of GDP are revised.
Thanks wolf
Consumer spending in dollars is chained to inflation (what about consumer sales?) and fixed investment , is that AI? and if GDP and CPI rise together at some point CPI will rise faster, just saying, and that will scare the hell out of a lot of people. but I dont get it, we are being taxed to death, income, sales and tariffs and people have money to spend?
ALL data cited here are expressed in 2017 dollars to adjust for inflation, no exceptions.
No no no, too much good news and not enough ammo for the FED to continue to cut again without appearing they are under pressure for political reason only. MSM need to be quick to come up with some headlines to show the economy is going off the cliff and we need more cuts now…we need urgent manufacture consent…lol
Idly switching TV channels made me wonder; is there a difference between the media’s favorite learned economists hoping for a recession and the Weather Channel anchors hoping for a hurricane?
Perfect !!!!!!
The Fed needs to raise rates. GDP is much better than expected, inflation is rising. If 2 million people (illegals arrested and voluntary leavings) have left the labor force, as the administration says, then jobs numbers should decrease, but the unemployment rate should stay about the same. And so it has. BTW, this is bad news for businesses and landlords, and good news for remaining workers whose wages should increase. The core PCE price index tomorrow will be interesting.
Two million gone, eight million more to go!
I think its bad news for remittances to Mexico.
Agreed. But they wont, for now at least…..
This growth rate is indicative of incoming inflation. The GDP growth rate cannot be higher than sustainable pace. This is investment driven growth. Massive investment eventually will cause price to rise. Fed knows this. Yet, Fed wants to cut rates to make the economy hotter.
Extract inflationary liquidity by resuming the $50B per month Treasury QT.
I know you’ll hate this, but I have to scramble up data:
At the peak of the dot-com boom in 2000, telecommunications capital expenditure (capex) was 1.1% to 1.2% of U.S. GDP.
At 2%, the current projected investment in AI infrastructure is significantly higher as a percentage of GDP than the telecom spending at the height of the dot-com bubble.
I believe GDP was revised lower, after the Dotcom Blimp exploded.
Oh wait, this is from some random raccoon inside the internet, about a month ago:
“Private investment in information processing equipment and software by itself grew at an astounding annualized rate of 28.3% over the first half of 2025. This is the AI boom that is underway. Without it, GDP in the second quarter of 2025 would be below where it was in the last quarter of 2024.”
Maybe AI translates to lower grocery prices — I can’t say?
When the AI investment boom stops, a recession starts. I’ve said this for a long time.
But what would make it stop?
The theoretical eventual need for revenues to exceed expenses?
Not making money off of AI.
Which is coming sooner than most think. AI has some value but there are significant shortfalls that people will eventually realize. The biggest one being is there is no human QA and LLMs often get things wrong.
AI is good enough for a quick internet search. Not good enough for things that actually matter and involve human life and protection of major investments.
‘Thanks to the mighty consumer,’ GDP shows more spring in U.S. economic growth
Jobless claims fall to lowest level since mid-July, easing labor-market concerns
Could the Federal Reserve skip an interest-rate cut next month?
Wall Street is starting to rethink the need for multiple interest-rate cuts into 2026
Dow, S&P 500 and Nasdaq close lower for third straight day, as Wall Street re-evaluates rate cuts
Time for another rate cut I guess.
The economy is great if you’re rich.
It isn’t great if you don’t own a home and are middle income or lower. They’re getting beaten down day in and day out. Wonder how it feels for them to get kicked over and over again and be told by everyone that the economy is fine.
I talk to some of them. They’re absolutely miserable.
Just because I own a home, doesn’t make the “economy” a lot better for me.
Yes, STILL: Not Homeless!
The cost of owning is still on the rise. Special assessment to insure the building. At least we have insurance (as our previous company left the market altogether and it was just the next in the series).
I don’t think GDP means what we think it means.
Hopefully the incentives are such that investment in new production continues to grow. Hopefully education in the US turns around and starts producing engineers, trades men and mechanics.
I’m not sure we will know of any of this is actually happening for several years.
Meanwhile Boeing is unable to build 737’s at previous rates – a 30 year old design.
The Navy is unable to build ships and submarines faster than they are being retired.
China rolls out 3 brand new aircraft types to go with their new Aircraft carrier while Boeing hopes to fly it’s first F47 in 2028 and F35 Block 4 is delayed again. Block 4 which in reality is the first F35 version that is supposed to be fully mission ready as originally specified.
The one bright spot (I’m sure there others) is SpaceX/Starlink and Tesla as companies that are actually good at inventing and building stuff. Granted, Tesla may be dragging in the automobile business (for now), but Elon seems to have lost interest in cars and is refocusing on other stuff (robots, AI ?). Maybe those efforts succeed or fail. We will find out. At least he’s not absorbed with a buyback scheme to “improve shareholder value”
Good lordy. What a ridiculous statement. Do you know anything at all about the US economy?
The US is the 2nd largest manufacturing country in the world, behind China, and bigger than the next three combined (Japan plus Germany plus either India or South Korea).
Well, it does help that there are 340 million people living here. It’s driven by consumer spending and foreign investment too . Airbus in Mobile, Siemens in Sacramento, Honda in Ohio, Hyundai in Georgia, Mercedes in Oregon, Orsted in Rhode Island, Austal in Alabama…..ASML here, Spotify there
With these good up revisions, will Trump award someone at the BEA a medal rather than demand they are FIRED?
Something REALLY reeks about all this. Rate cuts? What a JOKE.
Booming GDP meets foreign investor rejection at recent auction —- hmmm? Probably nothing.
Foreign demand: Dropped significantly, from nearly 78% in the previous month to 56%, a four-year low. This placed greater pressure on domestic buyers to absorb the issuance.
You’re citing BS and twist it to suit your fantasy theory. Actual foreign buying can only be seen in the Treasury Allotment Report, which comes out twice a month. Everything else is BS. Auctions through August 31:
The mix between the implicit price deflator and real gDp seems wrong. Inflation should be a higher component. But money flows are up with N-gDp. Probably something I don’t understand.