US GDP grew at a 3.8% annualized pace in Q2, surpassing estimates of 3.3%, leading the press to cheer a strong and robust economy. By design, the GDP calculation counts net exports as a positive. When imports collapse, GDP rises even though that is a signal of weakened consumer demand.
Consumer spending rose by 2.5%, rising 0.6% from Q1, and overperformed compared to the 1.6% estimate. Again, the underlying cause of that rise is not consumer confidence. The price of goods remains elevated, and consumers are spending more on less. Household debt is now at record highs across every area, from mortgages to credit cards and auto loans. It is an illusion that higher consumer spending indicates prosperity.
The Bureau of Economic Analysis (BEA) accurately stated that the “primarily reflected a decrease in imports, which are a substraction in the calculation of GDP, and an increase in consumer spending. These movements were partly offset by decreases in investment and exports.” This does not mean companies are simply purchasing domestically due to tariffs.
The GDP calculation, albeit better than anticipated, does not indicate long-term strength in the economy. The decline in imports has skewed the figure in favor of government so it looks as if policies are working and the US is somehow immune to the global economic decline. The US cannot experience meaningful growth when demand in declining due a loss of confidence and debt is rapidly accumulating.