With the Fed set to make a rate decision today, will this report change their minds?
A sizable decline in the amount of imports in the second quarter, likely caused by tariff uncertainty, helped propel the Gross Domestic Product (GDP) to a Q2 surge of 3.0%.
The rebound follows a first-quarter drop in GDP, led largely by a pre-tariff surge in imports.
One positive sign for the housing market is that consumer spending increased in Q2 by 1.4%, after only going up by 0.5% in Q1.
On the downside for mortgage brokers was a fall in gross private domestic investment, down 15.6% in Q2 after a 23.8% increase in the first quarter. Non-residential structure investment was the largest factor in the drop, falling 10.3%. Residential investment fell 4.6% after falling just 1.3% last quarter.
Joel Kan, Mortgage Bankers Association (MBA) VP and deputy chief economist, said tariffs are causing big swings in the numbers.
“This was a strong reading for economic activity in the second quarter, showing a growth rate of 3.0%, which followed a contraction of 0.5 percent in the first quarter,” Kan said. “Due to the impact of tariffs and future tariff implementation, we continue to see large swings in import and export activity, which impact the topline growth number.
“Personal consumption expenditures picked up slightly and provided a percentage point boost to overall growth after slowing briefly in the first quarter. The growth in consumer spending on goods and services, while positive thus far in 2025, has been at a slower pace than in 2024.”
The personal consumption expenditures price index, the key inflation metric for the Fed, gained 2.1% for the quarter, just above the 2.0% target. Core PCE increased 2.5%. Kan believes that while the lower PCE numbers are a good sign, tariff impacts might still be unknown.
“The impact from implemented tariffs will take time to be reflected in prices,” Kan said. “We continue to expect that economic growth will slow in the second half of the year, a pickup in the pace of inflation, along with a reduced pace of hiring and rising unemployment.”
Dow Jones had estimated that GDP would increase by 2.3%, so the numbers came in above expectations.
Pressure on the Fed
President Trump took to Truth Social on Wednesday in the wake of the GDP report to send one final message to the Federal Reserve and chair Jerome Powell before this afternoon’s rate announcement. The Fed is expected to hold rates steady.
“2Q GDP JUST OUT: 3%, WAY BETTER THAN EXPECTED! “Too Late” MUST NOW LOWER THE RATE. No Inflation! Let people buy, and refinance, their homes!” Trump said on Truth Social.
Mortgage broker Matt Gouge says high prices and rates are causing buyer hesitation, especially in California, but underlying demand remains strong.https://t.co/8rvCRZ2LYt
— Mortgage Professional America Magazine (@MPAMagazineUS) July 30, 2025
Bill Pulte, director of the FHFA, posted yesterday on Twitter that, “(Wednesday) is a big day for Jay Powell, and of course, America.”
While today’s GDP announcement is unlikely to change the Fed’s mind about a rate cut today, it could pave the way for more dissent inside the Federal Reserve, which could signal how aggressively they will look to cut rates the rest of 2025.
Import declines
Imports provided a 5.0% boost to the GDP in Q2. Increases in imports are subtracted from the GDP, while decreases are added.
Overall, imports fell 30.3% in Q2 after a 37.9% increase in the first quarter. Imported goods were the most significant contributor to the fall, with a 35.3% decline after going up 51.6% in Q1.
“The drop in imports added five percentage points to growth, reversing a drag of similar size in the first quarter,” Kan said. “This was due to businesses pulling back on their goods purchases after front-loading a significant portion of their investment in the first quarter before the full extent of tariffs kicked in. Business fixed investment also declined over the quarter, following a sizable growth rate in the first quarter. Federal government spending and investment decreased for the second consecutive quarter.”
The Trump administration started its tariff battle on April 2, a day which was termed “liberation day” by the administration. After several stops and starts, another trade deal deadline looms on Friday, although it is unclear whether there will be further extensions or not.
Exports were also down in Q2, likely caused by reciprocal tariffs that some countries imposed in the wake of new US tariffs. Exports fell 1.8% after a 0.4% increase in Q1. Exported goods saw the steepest decline, falling 5.0% after rising 6.5% in Q1.
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