U.S. Q2 GDP Accelerates While Consumer Demand Slows
Weekly Economic Review: August 4, 2025
This week’s economic data highlights include: (1) Q2 GDP, (2) the July 29-30 FOMC meeting, (3) the PCE Price Index and personal income and outlays, and (4) job creation and employment situation.
Key Summary:
The U.S. economy grew 3.0% in Q2, driven by a sharp drop in imports and rebounding consumer spending, but underlying demand weakened due to falling private investment and slower final sales.
In the second quarter, the U.S. economy grew by 3.0%, bouncing back from a 0.5% contraction in the previous quarter and surpassing expectations of 2.6%. The expansion was largely driven by a sharp decline in imports, which positively impacted GDP, along with a recovery in consumer spending and a modest increase in government expenditures. These gains were partially offset by a notable drop in private investment, which had previously surged. Net exports made a significant positive contribution to growth, while consumer and government spending added modest support. Private investment, however, weighed heavily on the overall figure due to reductions in inventories and weakness in fixed investment.
Consumer spending, which represents the largest share of GDP, recovered thanks to increased purchases of durable goods — particularly motor vehicles — and higher spending on services such as health care and hospitality. Private investment contracted, with business spending on equipment slowing and residential investment declining amid continued housing market challenges. Inventory reductions marked the largest drag on growth in several years. Government spending rose slightly, driven by increased state and local expenditures, while federal spending declined due to cuts in non-defense programs. A key measure of underlying demand, final sales to private domestic purchasers, grew at a slower pace than in the previous quarter, indicating a softening in domestic economic momentum despite the headline GDP improvement.
The Fed held rates steady amid a softened economic outlook, with rare dissent favoring a cut, while Chair Powell signaled current policy remains appropriate despite labor market risks and persistent inflation.
The FOMC voted to keep interest rates unchanged for the fifth consecutive meeting, with two dissenting votes in favor of a rate cut – the first dual dissent from board members since 1993. While the committee downgraded its economic outlook, noting that growth had moderated, Chair Powell emphasized that most members believe current policy remains appropriately restrictive. The labor market was described as solid but facing downside risks. Inflation remained stubborn despite easing in services, with rising goods prices partly attributed to tariffs beginning to affect consumers.
Inflation continued to persist as both headline and core PCE rose modestly, driven by higher prices for goods and services, signaling continued pressure despite stable income growth.
In June, the headline PCE price index rose modestly by 0.3%, driven by higher prices for both goods and services, with food and energy contributing to the monthly increase. On a year-over-year basis, inflation accelerated slightly to 2.6%, led by a notable rise in services prices, while energy prices declined. The Core PCE index, which excludes food and energy and is closely watched by the Federal Reserve, also saw a monthly uptick of 0.3% and remained elevated at 2.8% annually, indicating persistent underlying inflation pressures.
Personal income and disposable income both increased, supported by gains in government benefits and wages. Real disposable income was flat due to inflation, while personal savings edged slightly lower. Personal spending rose modestly, driven by increases in both goods and services, with notable contributions from energy-related products, used vehicles, financial services, and health care. Spending growth came in slightly below expectations, however, reflecting a cautious consumer environment amid ongoing inflation concerns.
The labor market weakened as job growth slowed and government and manufacturing employment declined, while the unemployment rate rose amid falling labor force participation and rising long-term unemployment, compounded by significant downward revisions to previous months’ job gains.
The U.S. labor market continued to show signs of cooling in July, with businesses adding just 73,000 jobs, well below expectations. Moreover, significant downward revisions to the May and June figures resulted in a net reduction of 258,000 jobs, bringing the three-month average to its lowest level since mid-2020. Private sector employment rose modestly, led by gains in healthcare and social assistance, while government jobs declined, particularly in the federal sector, which has now seen six consecutive months of losses.
The unemployment rate rose to 4.2%, up from 4.1% in June, driven by a decline in overall employment despite a reduction in the labor force . Labor force participation fell to its lowest level since November 2022, and the number of foreign-born workers continued to drop sharply, reflect-ing the impact of stricter immigration policies. Long-term unemployment increased again, with more individuals remaining jobless for extended periods, and the median duration of unemployment also rose.
Additional indicators pointed to labor market weakness: layoffs increased, temporary help services employment declined, and more individuals were working part-time for economic reasons. The share of multiple jobholders also fell, suggesting growing constraints in job availability. Despite the slowdown in hiring, some stability remains in income levels, helping to support consumer spending in the near term.
Let’s take a closer look at this week’s key data releases, including Q2 GDP, the July 29–30 FOMC meeting, the PCE Price Index and personal income and outlays, as well as the latest job creation and employment figures.
Q2 2025 GDP (Initial Release):
According to the initial estimate from the Bureau of Economic Analysis (BEA), the U.S. economy expanded by 3.0% in the second quarter, a sharp rebound from the 0.5% contraction in Q1 and above the market expectation of 2.6%. The growth was primarily driven by a 30.3% decline in imports (which subtract from GDP), following a 37.9% surge in the previous quarter, along with a 1.4% increase in consumer spending and a 0.08% rise in government spending. These gains were partially offset by a 15.6% drop in private investment after a strong 23.8% increase in Q1. Net ex-ports contributed 4.99% to GDP growth, with a decline in imports adding 5.18% and lower exports subtracting 0.19%. Consumer and government spending contributed 0.98% and 0.08%, respectively, while private investment detracted 3.09%, driven by a 3.17% decline in inventories and a modest 0.08% gain in fixed investment.
Consumer spending, which accounts for two-thirds of GDP, rebounded from 0.5% in the previous quarter. The increase was primarily driven by a rebound to 3.7% growth in durable goods purchases in the second quarter from -3.7% in the first quarter due mainly to a 16.3% increase in mo-tor vehicles after preemptive purchasing in earlier periods in anticipation of higher tariff-related prices. Spending on services also increased by 1.1%, primarily driven by health care (3.0%) and food services and accommodation (3.2%).
Private investment significantly contracted, with nonresidential investment, including business spending on equipment and structures, rising just 1.9% after surging 10.3% in the previous quarter. Business spending on equipment grew at a 4.8% rate after surging 23.7% in the previous quarter, while spending on structures such as factories decreased for a second straight quarter. The change in private inventories subtracted 3.17% from growth, the most since the second quarter of 2020. Residential investment declined 4.6% after falling 1.3% in the first quarter, the most since the fourth quarter of 2022, reflecting continued housing market weakness.
The slight increase in government spending was primarily driven by a 0.32% increase in state and local government spending, partially offset by a 0.24% decline in federal government. This federal government spending decline was led by a decline of 0.32% of non-defense spending, the most since the third quarter of 2021. Federal government spending declined for the second consecutive quarter and is likely to continue due to spending cuts on many programs.
Final sales to private domestic purchasers, a key indicator of economic activity that excludes inventories, trade, government spending, and other volatile categories, increased by 1.2%, down from 1.9% in the previous quarter. This index, which measures private demand in the economy, represents the sum of consumer spending and private investment. The second quarter figure was the weakest growth in domestic demand since the fourth quarter of 2022 and indicates that economic growth was slowing down even without tariff costs being fully passed through to consumers.
July 29-30 FOMC Meeting:
The FOMC voted 9–2 to keep its benchmark interest rate unchanged for the fifth consecutive meeting, maintaining the target range of 4.25% to 4.5%. Governors Chris Waller and Michelle Bowman dissented, advocating for a quarter-point rate cut—the first dual dissent from board members since 1993. In its post-meeting statement, the committee downgraded its economic outlook, noting that growth had moderated in the first half of the year, replacing its previous description of growth as “solid.” Despite this, Chair Powell stated that most members believe the current policy remains appropriately restrictive and is not unduly hindering economic performance. The committee reiterated that the labor market remains solid, and inflation is still somewhat elevated.
During the press conference, Chair Powell acknowledged balanced labor market dynamics but highlighted emerging downside risks. He noted that services inflation continues to ease, while goods prices have risen in some sectors due to tariffs, which are beginning to affect consumer prices—though businesses have largely absorbed the impact so far. Powell also cautioned that while inflation is expected to be temporary, there is a risk it could become more persistent.
PCE Price Index & Personal Income and Outlays – June Update:
The Bureau of Economic Analysis reported the latest statistics on the PCE price index, personal income, and personal spending:
PCE Price Index: In June, the headline Personal Consumption Expenditures (PCE) price index rose by 0.3% month-over-month, matching market expectations and exceeding May’s revised in-crease of 0.2% (up from 0.1%). The monthly gain was driven by higher prices for both goods and services, with food prices up 0.3% and energy prices up 0.9%. On a year-over-year basis, head-line PCE inflation rose to 2.6%, up from 2.4% in May (revised from 2.3%) and above the expected 2.5%, primarily due to a 3.5% increase in services prices. Over the same period, food prices rose 2.2%, while energy prices declined 1.6%.
The Core PCE index – excluding food and energy and considered the Federal Reserve’s preferred inflation gauge – also rose 0.3% month-over-month in June, up from 0.2% in May and in line with expectations. On an annual basis, Core PCE inflation held steady at 2.8%, slightly above the expected 2.7%, and unchanged from the previous month (revised up from 2.7%), indicating continued underlying inflation pressures.
Personal Income: Personal income rose by 0.3% month-over-month in June, exceeding market expectations and reversing the decline seen in May. The increase was primarily driven by higher government social benefits—including Social Security, Medicare, and Medicaid—as well as gains in wages and salaries.
Disposable personal income, a key driver of consumer spending, also increased by 0.3%, follow-ing a decline in the previous month. However, real disposable income, which is adjusted for inflation, remained flat. Personal savings edged slightly lower to just over $1 trillion, while the personal saving rate held steady at 4.5%.
Personal Spending: Personal spending, or consumer spending, rose by 0.3% month-over-month in June, following a flat reading in May (revised up from -0.1%), but came in below market expectations of a 0.4% gain. The increase was driven by a 0.5% rise in goods and a 0.3% rise in services. Within goods, the largest contributors were gasoline and other energy-related products (+2.9%) and used vehicles (+1.5%), partially offset by a decline in new vehicles (-2.3%). In services, financial services and insurance (+0.6%), health care (+0.5%), and housing and utilities (+0.4%) led the gains, while public transportation (-1.7%) and recreation services (-0.6%) declined.
Job Creation and Employment Situation – July Update:
According to the BLS, the U.S. labor market showed signs of continued cooling in July, with businesses adding 73,000 jobs, well below the market expectation of 104,000. This marks a notable slowdown, especially when considering downward revisions to prior months: June’s job gains were revised down by 133,000 to just 14,000, and May’s were revised down by 125,000 to 19,000, resulting in a net downward revision of 258,000. The three-month moving average fell to 35,000, the lowest since June 2020, underscoring a significant deceleration in hiring momentum.
Private sector employment rose by 83,000, missing forecasts of 100,000, while government employment declined by 10,000, driven by a 12,000 drop in federal jobs — marking the sixth consecutive monthly decline and a cumulative loss of 84,000 since January. Within the private sector, the service industry added 96,000 jobs, led by healthcare (+55,400) and social assistance (+17,900). However, the goods-producing sector lost 13,000 jobs, with manufacturing down 11,000, continuing a three-month streak of declines. These figures reflect a labor market increasingly reliant on service-sector growth, while industrial and public sector employment continues to contract.
The unemployment rate rose to 4.2%, up from 4.1% in June, in line with expectations. This in-crease was driven by a 260,000 drop in employment combined with a 38,000 decline in the labor force. The labor force participation rate edged down to 62.2%, its lowest level since November 2022, and has now declined for three consecutive months. A sharp drop in foreign-born workers—down 625,000 in July—continued a four-month trend, likely influenced by stricter immigration poli-cies under the Trump administration. Long-term unemployment rose again, with 1.83 million people unemployed for 27 weeks or more, the highest since December 2021, and the median duration of unemployment increased to 10.2 weeks.
Layoffs rose significantly, with 112,000 more job losers, including 32,000 permanent and 80,000 temporary layoffs. In contrast, job leavers – those voluntarily leaving jobs – fell 41,000 to 784,000, reversing a sharp increase in June. Employment in temporary help services, a leading labor mar-ket indicator, declined by 4,400, continuing a downward trend. The number of people working part-time for economic reasons – those who prefer full-time work but are constrained by reduced hours or lack of full-time opportunities – rose by 219,000 to 4.68 million, while the share of multiple job-holders fell to 5.1% of total employment, reflecting a 523,000 decline.
Wage growth remained steady, with average hourly earnings rising 0.3% month-over-month and 3.9% year-over-year, slightly above expectations. Meanwhile, average weekly hours worked increased to 34.3, up from 34.2 in June, also exceeding forecasts. These figures suggest that while hiring is slowing, wage and hour metrics remain relatively stable, providing some support to household income and spending.
Market Analysis:
Equity markets ended the week with sharp losses, primarily driven by weak labor data and Trump’s imposition of sweeping tariffs on many trading partners. The S&P 500 declined 2.4%, the worst weekly performance since May 23rd. The Dow Jones Industrial Average dropped 2.9%, marking its worst week since April 4th. The Nasdaq also retreated 2.2%, weighted down by weak-ness in tech-related small caps. Small-cap stocks, which are typically more sensitive to economic slowdowns, were hit hardest. The Russell 2000 plunged 4.2% for the week, reflecting heightened investor concerns about the economic outlook.
Treasury yields declined over the week, driven by softer-than-expected jobs data. The 2-year, 5-year, and 10-year notes fell by 22, 18, and 17 basis points, respectively, ending the week at 3.69%, 3.77%, and 4.23%.
Markets are currently pricing in two quarter-point rate cuts in 2025, totaling a 0.50% reduction. The first cut is expected in either September, with an 87% probability, or October, with a 100% probability. A second cut is anticipated in December, also with a 100% probability. Looking further ahead, markets are projecting three additional cuts by October 2026.
Next Week’s Economic Calendar:
The economic calendar is relatively light next week. It begins on Monday with the final June durable goods report and June factory orders. On Tuesday, the ISM Services Index will be released. Wednesday brings weekly mortgage application data, followed by Thursday’s reports on jobless claims, non-farm productivity, unit labor costs, and consumer credit.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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