It certainly seems hyper-politicization has come to every piece of economic data. Last week’s data are poster children for this, and the overbroad interpretations of the data by investors, the general public, policymakers, and politicians sow confusion.
Wednesday’s GDP report was a prime example. The headline was solid, with the real economy growing at a 3.0% annual rate in the second quarter, beating the consensus expected 2.6% pace and rebounding sharply from the 0.5% decline in Q1. Some reacted like the report heralded a new era of prosperity and was a sign that the Trump Administration’s policies are successful.
Don’t get us wrong, the extension and deepening of the tax cuts enacted in the Big Beautiful Bill (including permanent accelerated business investment expensing) as well as the law’s curbs on the growth rate of Medicaid will promote long-term US economic growth. We think the same about efforts to reduce discretionary spending, slimming down agencies, sending workers out of DC, and cutting regulation. But the rebound in economic growth in Q2 wasn’t evidence that agenda is already working.
Instead, the drop in real GDP in the first quarter and rebound in the second is largely a reflection of how businesses reacted to the roll-out of tariffs. President Trump promised early this year to raise them, and in response, businesses were front-running tariffs in Q1, rapidly filling orders from their foreign suppliers and putting some orders from US producers on the backburner. Because imports are not domestic production, they are subtracted from purchases when calculating real GDP. But once higher tariffs actually arrived, businesses slowed orders from abroad and shifted back to US producers. Hence, GDP volatility.
Putting the two quarters together, real GDP was up at a modest 1.2% annual rate in the first half of the year, which is below the 2.0% average of the past twenty years.
Growth at roughly half the rate of the past twenty years then affected Friday’s Employment report, and the problem flipped from interpretations that were overly optimistic to ones that could be overly pessimistic. The US economy is certainly not out of the woods when it comes to recession risk. Monetary policy has been tight enough to reduce inflation toward the Federal Reserve’s 2.0% target and is probably still modestly tight today. And a monetary policy tight enough to reduce inflation may also be tight enough to induce a recession, particularly now that the budget deficit is no longer expanding as rapidly as it was in 2023-24. But Friday’s jobs report does not by itself signal a recession.
