The US economy faced a reality check last quarter. Growth slowed to 1.6% annual rate from April through June. This marks a sharp decline from the robust 3.4% growth in the first three months of 2024. Economists had predicted about 2% growth, making the actual figure particularly disappointing.
What’s behind this sudden slowdown? Several factors are at play, but trade policy stands out. American businesses dramatically cut their inventory investments as new tariffs made imported goods more expensive. Companies simply ordered less stuff to sell later. The math is clear – reduced inventory investment subtracted a full percentage point from GDP growth.
“This report shows the real economic impact of rising trade barriers,” says Diane Swonk, chief economist at KPMG. “When you make imports more expensive through tariffs, businesses respond by importing less, and that ripples through the supply chain.”
Consumer spending, which powers about 70% of the economy, also showed concerning signs. While overall consumption grew at 2.3%, this represents a notable cooling from previous quarters. Americans spent more on essentials like housing and healthcare but cut back on big-ticket items and some services.
The Federal Reserve is watching these developments closely. The central bank has kept interest rates at two-decade highs to fight inflation. But with economic growth now slowing and inflation moderating, pressure is mounting for rate cuts as soon as September.
“The Fed now faces a tricky balancing act,” explains Mark Zandi, chief economist at Moody’s Analytics. “They’ve been focused on inflation, but they can’t ignore these warning signs in the growth data.”
Business investment numbers tell a similarly concerning story. Nonresidential fixed investment – the money companies put into equipment, structures, and intellectual property – grew at just 1.5%, much lower than previous quarters. This suggests businesses are becoming more cautious about future economic conditions.
Housing investment provided a rare bright spot, increasing at a 5.3% annual rate. This marks the fourth straight quarterly gain in residential investment, reflecting ongoing demand for homes despite high mortgage rates. However, experts caution this momentum might fade if economic uncertainty continues.
Trade policy remains a key driver of business uncertainty. The Biden administration has kept many Trump-era tariffs and added new ones on Chinese electric vehicles, semiconductors, and medical supplies. A second Trump administration would likely expand these trade barriers further.
“Companies can’t plan effectively when they don’t know what goods will face new tariffs next year,” notes Emily Blanchard, former chief economist at the Office of the U.S. Trade Representative. “This uncertainty leads to delayed investments and cautious inventory management.”
Government spending contributed positively to GDP, growing at 2.4%. Federal government spending increased 3.9% while state and local government spending rose 1.6%. These figures reflect ongoing infrastructure investments and pandemic recovery programs.
The GDP report wasn’t all bad news. Personal incomes continued rising, with disposable personal income growing 2.2% after adjusting for inflation. The personal saving rate also increased slightly to 5.2%, suggesting some households are building financial buffers amid economic uncertainty.
Financial markets reacted negatively to the GDP surprise. Stock futures dropped immediately after the report’s release, with investors recalibrating their expectations for corporate profits in a slower-growth environment.
Looking ahead, economists remain divided on whether this slowdown represents a temporary blip or the beginning of a more concerning trend. The Congressional Budget Office recently forecast 2.2% growth for 2024 as a whole, but achieving that would require stronger performance in the second half of the year.
“One quarter doesn’t make a trend, but these numbers warrant attention,” says Julia Coronado, president of MacroPolicy Perspectives. “The resilience we’ve seen in the U.S. economy may be starting to fade.”
The slowdown raises political stakes in an election year. Economic performance consistently ranks among voters’ top concerns, and both parties will likely spin these figures to support their narratives about economic management.
For everyday Americans, the implications are mixed. A slower economy typically means fewer job opportunities and weaker wage growth. However, it also increases the likelihood of interest rate cuts, which could eventually provide relief on mortgages, car loans, and credit card debt.
Businesses must now navigate this more challenging landscape. Companies dependent on imported inputs face higher costs and supply chain complications. Those selling to consumers may encounter more price-sensitive shoppers as economic concerns mount.
Economists will closely watch upcoming data on employment, consumer spending, and manufacturing to determine whether this slowdown is spreading across more sectors. The July jobs report, due next week, will provide crucial insights into labor market health amid cooling growth.
What seems increasingly clear is that trade policy decisions have real economic consequences. As tariffs reshape global supply chains, their impact extends far beyond the specific industries they target, affecting overall economic momentum in ways that are now becoming measurable.
