US GDP (Q2 2025 – third estimate and NIPA revisions)

From resilience to headwinds: US growth faces slower path ahead

Real GDP growth was notably upgraded in the final Q2 estimate – from 3.3% to an annualized 3.8% – following a 0.6% annualized contraction in Q1. While Q2’s strong performance was driven by a sharp drop in imports after a surge in tariff-related purchases in the prior quarter, the key factor behind the upward revision was stronger consumer spending and even faster artificial intelligence-related (AI) business investment. Overall, underlying economic momentum remained steady in the first half of the year despite mounting policy headwinds. But with the impact of tariffs and policy uncertainty becoming increasingly visible, slower US growth and higher inflation are still on the horizon.

What are the main takeaways? 

• Consumer spending showed resilience amid mounting headwinds. Consumer spending saw a significant upgrade with growth reported at 2.5% annualized (1.6% previously), adding 1.7 percentage points (ppt) to overall GDP growth in Q2. The revision was largely driven by stronger spending on services, which were revised 1.4ppt higher to 2.6%. Consumers are holding up, but headwinds from higher inflation and labor market softness are growing. Combined with elevated costs and heightened price sensitivity, this will likely constrain consumer demand in coming quarters.
  
  
• The capital expenditure outlook is bifurcated amid an AI investment boom. Business investment growth saw another large 1.6ppt upward revision to 7.3% on even stronger spending on intellectual property (IP) products – up 15% annualized, which marked the strongest advance since the late-1990s IT boom. Software investment skyrocketed at an annualized rate of 198% in Q2, fueled by strong corporate demand for digital transformation and AI-related capabilities. Equipment investment grew a robust 8.5% annualized, driven by an 11.7% surge in information processing equipment. In contrast, investment in structures declined by 7.5% annualized, marking its sixth consecutive quarterly drop. 
  
  
• Domestic momentum remained steady in the first half of the year with final sales to private domestic purchasers – GDP excluding the contributions from trade, inventories and government spending – rising 2.9% on the quarter (1.9% previously) and 2.7% year over year (y/y) in Q2, following 2.9% and 2.8% growth in Q4 2024 and Q1 2025, respectively.
  
  
• Policy uncertainty and tariffs caused significant volatility in trade and inventory flows. Net international trade made its largest contribution to GDP growth on record (data goes back to 1947), adding 4.8ppt to growth in Q2. This mainly stemmed from the imports unwinding following a Q1 surge. Imports plunged 29.3% – the largest decline outside a recession since 1969 – following a Q1 surge. This was partially offset by the largest inventory decline on record outside of a recession. Inventories subtracted 3.4ppt from real GDP growth as businesses drew from their stocks to avoid paying prohibitive duties on their merchandise.
  
  
• Inflation was on a disinflationary path before the tariff impact. Headline personal consumption expenditures (PCE) inflation eased a tick to 2.4% y/y while core PCE inflation stayed at 2.7% y/y, confirming that disinflationary forces from shelter, slower wage growth and robust productivity growth were in place before tariffs started to pass through. While many businesses have managed to soften the impact of tariffs by relying on pre-tariff inventories and accepting slimmer margins, these buffers are likely to fade. We expect core Consumer Price Index (CPI) inflation to accelerate toward 3.2% y/y by year-end. Core PCE inflation, the Fed’s favored inflation gauge, is likely to be around 3.2% by year-end.
  
  
• The U.S. Bureau of Economic Analysis’ (BEA) annual revisions to the National Income and Product Accounts (NIPA) were minor and did not alter the overall trajectory of the economy in recent quarters, which has transitioned from a 3% growth trend to a slower 2% pace. Real GDP growth in 2023 and 2024 was unchanged at 2.9% and 2.8%, respectively. And the slower trajectory for the US economy remained intact with economic momentum easing from 3% y/y in Q2 2024 to 2.1% in Q2 2025. Meanwhile, the personal saving rate was revised higher from 4.6% in Q2 2025 to 5.3% after the revisions. This suggests healthier household finances heading into the second half of 2025.

Notwithstanding an expected moderate real GDP gain in Q3 — driven by resilient consumer spending, the AI investment boom and wild swings in international trade — growth is projected to decelerate in the second half of the year. The combined drag from tariff-related cost increases, persistent policy uncertainty, reduced immigration and elevated interest rates will weigh on business investment, household consumption and housing activity. We forecast real GDP growth of 1.7% in 2025 and 1.4% in 2026. While the probability of recession over the next 12 months currently stands at 40%, the balance of risks remains skewed to the downside.

Bottom line: for business executives, the environment ahead will require heightened agility in pricing, supply chain management, and talent strategy. Companies should prepare for margin pressures, slower volume growth and lingering uncertainty. The AI investment boom offers opportunities for digital transformation, but overall, the balance of risks remains titled to the downside, making proactive risk management and scenario planning essential for resilience and performance in the coming quarters.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.