The U.S. economy rebounded in the second quarter with 3.0% annualized growth following a first-quarter contraction, while the Federal Reserve maintained interest rates unchanged on July 30.

The U.S. economy demonstrated resilience in the second quarter of 2025, with gross domestic product (GDP) expanding at an annualized rate of 3.0% according to the Bureau of Economic Analysis’s advance estimate.

The economic fluctuations were largely driven by dramatic swings in international trade patterns as businesses and consumers responded to President Trump’s comprehensive tariff program. Imports surged in the first quarter as companies rushed to stockpile foreign goods ahead of tariff implementation, then fell sharply in the second quarter as the trade barriers took effect.

The second-quarter growth was primarily fueled by decreased imports, which are subtracted from GDP calculations, and increased consumer spending. These positive factors were partially offset by declines in business investment and exports. Consumer spending, the economy’s main engine, increased modestly after nearly stagnating in the first quarter due to tariff-related uncertainty.

However, economists warn that the headline growth figure masks underlying economic weakness. Real final sales to private domestic purchasers – a key measure that excludes inventory changes and government spending – increased just 1.2% in the second quarter, down from 1.9% in the first quarter. This suggests domestic demand is slowing despite the strong headline GDP number.

Price indicators presented a more encouraging picture for policymakers. The personal consumption expenditures (PCE) price index increased 2.1% in the second quarter, significantly lower than the 3.7% rate in the first quarter. Core PCE inflation, excluding food and energy, also moderated to 2.5% from 3.5% in the previous quarter.

Despite these improvements, inflation remains above the Federal Reserve’s 2% target. Recent data shows the annual inflation rate accelerated to 2.7% in June, up from 2.4% in May, marking the highest level since February. The uptick was driven by higher prices for food, transportation services, and used vehicles, while energy costs declined less than expected.

Federal Reserve officials have expressed concern that tariffs are beginning to show through more clearly in consumer prices. The Budget Lab at Yale estimates that all 2025 tariffs could raise the overall price level by 1.7% to 2.1% in the short run, equivalent to an average household income loss of $2,300 to $2,800.

The Federal Reserve voted 9-2 to keep its benchmark interest rate unchanged in the 4.25% to 4.5% range, marking the fifth consecutive meeting without a rate change. However, the decision was notable for the rare dissent from two Fed governors – Michelle Bowman and Christopher Waller – both Trump appointees who favored a quarter-point rate cut.

This marked the first time since 1993 that two Fed governors dissented from a policy decision.

The Fed’s cautious approach comes from the uncertain effects of Trump’s tariff policies. Powell has indicated that tariffs could have either temporary or persistent inflationary effects.

While unemployment remains low at 4.1% in June, down slightly from 4.2% in May, economists are observing signs of labor market softening. The economy added 147,000 jobs in June, with notable gains in state government (+47,000) and healthcare (+39,200).

However, labor force participation rate declined to 62.3%, and there was a record monthly increase in discouraged workers – people who want jobs but are having difficulty finding them. Manufacturing employment declined by 7,000 jobs, while federal government employment continued to contract.

Economists forecast further softening in the July jobs report, with nonfarm payroll employment projected to rise by only 117,500, down from June’s 147,000. The unemployment rate is expected to tick up to 4.2%.

Treasury Secretary Scott Bessent and the Trump administration celebrated the GDP figures, with the White House stating that “President Trump has reduced America’s dependence on foreign goods, boosted domestic investment, and created thousands of jobs”. However, economists caution that the trade-driven volatility obscures the economy’s true underlying performance.