U.S. economy grows

In 2025’s second quarter, the economy regained solid footing supported by trade-related activity and continued consumer spending growth. After a modest first quarter decline, second quarter Gross Domestic Product (GDP), the primary U.S. economic growth measure, rose by an annualized rate of 3.8%. ¹

Falling imports drove growth. Rising net imports (the value of imported goods minus exported goods) detract from GDP. Imports surged in the first quarter as companies purchased foreign-made goods ahead of tariff implementation. A large inventory stockpile allowed companies to reduce second-quarter imports, boosting GDP. While import and export activity distorted calculations in the first half of the year, GDP grew at a solid 2.1% rate on a year-over-year basis in the second quarter, up from a 2.0% rate in the first quarter.

Consumer spending was a positive contributor along with modest growth in investment spending. ¹

“Shifting imports and inventory levels are likely temporarily distorting GDP, but general activity growth remains relatively steady compared to a year ago,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group.

Consumer spending

In the second quarter, consumer spending, as measured by Personal Consumption Expenditures (PCE), increased at a 2.5% annualized rate. In comparison PCE rose by 0.6% annualized in the first quarter. ² “Solid labor markets and wage growth enable consumers to maintain spending,” notes Haworth.

Low initial weekly jobless claims indicate limited corporate layoffs. However, recent non-farm payroll figures and prior revisions indicate weaker hiring activity. Stable annual wage gains suggest ongoing purchasing power. ³

What’s ahead for consumers?

Consumer spending accounts for nearly 70% of U.S. GDP and remains the key to ongoing economic growth. ¹ An important question is whether consumers maintain spending levels to keep the economy growing.

Haworth expresses a cautionary note. “Data shows that high interest rates and higher costs are pressuring lower income and some middle-income consumers .”

U.S. retail sales grew at an 5% in August compared year-ago levels. The pace of sales slowed slightly between April and May but rebounded in subsequent months. ⁴ “Consumers are hanging on and weighing how inflation will impact their buying decisions,” says Haworth.

President Donald Trump's tariff policy impact on consumer behavior remains modest for now. While some new tariffs hit key trading partners in recent months, the President delayed many of his proposed tariffs . The overall economic impact remains uncertain, but it adds a level of risk for both businesses and consumers.

“As companies start feeling effects of tariffs, their strategic decisions could drive costs higher,” says Haworth. “Are companies bearing those costs and reducing profit margins? Are they passing costs on to consumers, potentially boosting inflation? Or are they pushing suppliers to absorb the costs?”

The Federal Reserve restarts rate cuts

At their September meeting the Federal Reserve's (Fed’s) Federal Open Market Committee cut their short-term Federal Funds interest rate target by 0.25% to 4.00%-4.25% after cutting three times in late 2024. Fed Charman Jerome Powell echoed recent comments highlighting the balance of risks between softer employment data and above-target inflation justifies less restrictive policy. In the Committee’s latest Summary of Economic projections (September 2025), it’s median 2025 GDP growth forecast rose while unemployment and inflation expectations remained unchanged. ⁵ In recent weeks economists raised consensus forecasts for economic growth in 2025 and 2026, according to Bloomberg.

The Fed will next consider rates at its October 28-29, 2025 meeting, with markets implying an 89% chance of another 0.25% cut. Market prices also indicate high odds of an additional cut at the Fed’s December 9-10 meeting. This short-term interest rate influences borrowing costs such as auto loans and home mortgages.

Bill Merz, head of capital markets research with U.S. Bank Asset Management Group, notes labor market weakness played a larger role in the Fed’s interest rate decision this meeting and will continue to be a primary decisioning factor. “Negative labor market revisions indicate softer hiring over the last year and a half, but consumer spending remains solid,” says Merz.

Implications for investors

Throughout 2024, the economy’s ongoing strength helped corporations meet or exceed earnings expectations. For the second consecutive year, the S&P 500 generated total returns exceeding 25%.⁶ Haworth says the earnings outlook remains favorable for 2025. “Economic growth appears sufficient to keep the market buoyant, though likely with a degree of volatility.” Favorable earnings and economic fundamentals helped drive the S&P 500’s strong second-quarter results. After declining 15% through early April, the S&P 500, on a year-to-date basis through September 24, generated a total returns of more than 13%. ⁶ During that period, investors reacted favorably to moderate inflation and unemployment and improving corporate profits.

Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet your needs in today’s market and economic environment.

Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.