US Q2 GDP revised sharply upwards, clouding case for more Fed rate cuts

The US economy grew at its fastest pace in nearly two years in the second quarter, with gross domestic product (GDP) revised up to an annualized 3.8% rate, according to the Commerce Department’s latest estimate.

The expansion, driven by resilient consumer spending and a sharp contraction in the trade deficit, has complicated the outlook for further interest rate cuts by the Federal Reserve. 

Economists had expected GDP growth to remain unchanged at 3.3%, but new data showed that personal consumption expenditures rose at a 2.5% pace, up sharply from the previous estimate of 1.6%.

Consumer spending and trade drive rebound

A key factor behind the upward revision was stronger consumer spending, which accounts for more than two-thirds of US economic activity.

The report also highlighted a record 4.83-percentage-point boost to GDP from a shrinking trade deficit, as businesses slowed imports after a first-quarter surge to beat new tariffs. 

Business investment also contributed, with spending on intellectual property products revised up to a 15.0% rate and equipment investment up to 8.5%. Final sales to private domestic purchasers, a barometer of underlying economic growth, climbed 2.9% in the quarter.

Fed faces new questions on rate policy

The data, while positive, has led investors to question whether the Federal Reserve will proceed with additional rate cuts.

The strong GDP growth gives the Fed less urgency to cut rates. The central bank is expected to move cautiously, watching for sustained progress on inflation and signs of economic cooling before making further reductions.

For mortgage professionals, this means borrowing costs may remain elevated for longer, and any future rate cuts are likely to be gradual and data-dependent

Meanwhile, weekly jobless claims fell by 14,000 to 218,000, signaling continued labor market strength, though the jobless rate ticked up to 4.3% in August.

Economists expect growth to moderate in the second half of the year, with full-year expansion projected at about 1.5% amid persistent trade policy uncertainty.