Global Weekly Economic Update | Deloitte Insights

US economic growth more resilient than expected

• Real GDP in the United States grew faster in the second quarter than previously estimated, according to the third and final revised estimate of GDP from the government. How can we explain the evident resilience of the US economy, especially at a time of very slow job growth?

First, the government reports that, in the second quarter, real GDP grew at an annualized rate of 3.8% from the previous quarter. This is up from an initial estimate of 3.0% and a second estimate of 3.3%. This was due to a significant upward revision of growth in consumer spending, a slower decline in real business investment, and a bigger decline in imports (which has a positive impact on GDP growth).

In part, the strong growth resulted from a sharp decline in imports. Real (inflation-adjusted) imports of merchandise were down at an annual rate of 35.0% from the previous quarter. When the impact of trade and government spending are excluded, real GDP increased at an annual rate of 2.9%. When the government released its first estimate of GDP, this measure was up only 1.2%. That measure of underlying growth appeared to signal a weak economy. Now, with the revision, it appears that underlying growth was quite strong in the second quarter.

The main difference between the first and last estimates is the impact of the consumer, both through consumer spending and imports. The strength of consumer spending is somewhat surprising given the weak growth of employment that took place in the second quarter. However, real disposable personal income (household income after taxes and after inflation) increased at an annual rate of 3.1%, the fastest growth since the first quarter of 2024. This reflected strong wage gains in a tight labor market.

Also, it could be the case that households are spending rapidly in anticipation of higher prices due to tariffs later this year or next year. If true, that could set the stage for a slowdown in consumer spending growth once inflation starts to accelerate significantly. Moreover, an increase in inflation in the coming year will not only be due to tariffs. It will likely reflect the restrictive immigration policy leading to a labor shortage that drives up prices, as well as a surge in the cost of electricity due to the rapid rollout of data centers.

In any event, the evident strength of the economy might give pause to the Federal Reserve as it contemplates continuing its decision to ease monetary policy by cutting interest rates. After all, the Fed evidently chose to start easing because, although it expects a temporary boost to inflation, it worried that the economy is in danger of a sharp slowdown. With today’s revision, it will be harder to make that case. As such, there could be some spirited debates within the confines of the Fed over the future course of monetary policy. Indeed, the President of the Federal Reserve Bank of Chicago, Austen Goolsbee, said that “I’m uncomfortable with overly frontloading a lot of rate cuts on the presumption that [inflation] will probably just be transitory and go away.” The assumption of transitory inflation is based on the view that a weak economy is expected to prevent a wage-price spiral that could lead to sustained higher inflation.  Yet Goolsbee said that “we’ve still got a mostly steady and solid jobs market.” That, in turn, could help to sustain higher inflation.

• The US government reported that, in August, for the fifth consecutive month, the US personal savings rate declined from the previous month, thereby enabling household spending to rise faster than income. Indeed, this has contributed to the continued strong growth of the economy despite a marked slowdown in job creation. Meanwhile, the Federal Reserve’s favored measure of inflation indicated some acceleration, with prices of durable goods rising at the fastest pace since December 2022. This likely reflected the burgeoning impact of tariffs. Let’s look at the details:

In August, the personal savings rate (savings as a share of disposable income) fell to 4.6%, the lowest level since December 2024 and the second lowest level since December 2022. As such, although real disposable income only grew 0.1% from July to August, real personal consumption expenditures were up 0.4% from July to August. This included a stunning 0.9% real (inflation-adjusted) increase in spending on durable goods, a 0.5% increase for non-durables, and a 0.2% increase for services.

Why was consumer spending so resilient in August? Here are two possible answers.  First, equity prices have soared, boosting the wealth of relatively upscale households. Second, anticipation of the inflationary impact of tariffs might be causing households to frontload spending.

Meanwhile, the government also reported on the Fed’s favorite measure of inflation: the personal consumption expenditure deflator, or PCE-deflator. The deflator was up 2.7% in August versus a year earlier, the fastest rate of growth since February. When volatile food and energy prices are excluded, the core deflator was up 3.0% in August versus a year earlier. This was the same as in July and the highest since February.

More importantly, the prices of durable goods were up 1.2% in August versus a year earlier, the fastest rate of increase since December 2022 at the tail end of the pandemic. If we exclude the pandemic era supply chain disruption that boosted prices of durable goods, this was the biggest increase in durables prices since 1995. Also, prices of non-durables were up 0.7% while prices of services were up 3.6%. The latter has been steady for many months.

• Consumer sentiment in the United States has fallen again, according to the University of Michigan. Its consumer sentiment index fell 5.3% from August to September and was down 21.6% from a year earlier. This indicator was even lower in April and May when news on tariffs created fears. Excluding those two months, the September reading was the lowest since November 2022.

The decline in sentiment was seen across all ages, incomes, and education cohorts. The only exception was that sentiment improved for households with heavy exposure to equities.