U.S. economic activity rebounded in the second quarter of 2025, as the significant drop-off in goods imports, coupled with a notable increase in consumer spending, drove the increase in real GDP. Further reason for the Federal Reserve to hold off on cutting the federal funds rate at the conclusion of the FOMC meeting today.

Q2 GDP increased by 3 percent, more than offsetting the 0.5 percent decline in the first quarter and beating expectations for a 2.5 percent rise in the Econoday survey of forecasters.

Consumer spending as measured by Personal Consumption Expenditures was up 1.4 percent in Q2 following just a 0.5 percent uptick in the first quarter, while the demand for imports plunged 30.3 percent after Q1's 37.9 percent surge.

However, exports were also down last quarter tempering the increase in economic activity. The decline was by 1.8 percent, cancelling out 0.4 percent growth in the first quarter. Gross domestic private investment also plummeted, down 15.6 percent more than half of Q1's 23.8 percent jump.

Growth expected at 2.5 percent rate in the first look at Q2 after falling by 0.5 percent in Q1. PCE growth seen at 1.4 percent versus an anemic 0.5 percent in Q1. Net exports expected to boost the 2Q figure as imports surged in Q1 and fell back in Q2. Consumer spending remains soft.

Gross Domestic Product represents the total value of the country's production during the period and consists of the purchases of domestically-produced goods and services by individuals, businesses, foreigners and government entities. Data are available in nominal and real (inflation-adjusted) dollars, as well as in index form. Economists and market players always monitor the real growth rates generated by the GDP quantity index or the real dollar value. The quantity index measures inflation-adjusted activity, but we are more accustomed to looking at dollar values.

Household purchases are counted in personal consumption expenditures -- durable goods (such as furniture and cars), nondurable goods (such as clothing and food) and services (such as banking, education and transportation). Private housing purchases are classified as residential investment. Businesses invest in nonresidential structures, durable equipment and computer software. Inventories at all stages of production are counted as investment. Only inventory changes, not levels, are added to GDP.

Net exports equal the sum of exports less imports. Exports are the purchases by foreigners of goods and services produced in the United States. Imports represent domestic purchases of foreign-produced goods and services and must be deducted from the calculation of GDP. Government purchases of goods and services are the compensation of government employees and purchases from businesses and abroad. Data show the portion attributed to consumption and investment. Government outlays for transfer payments or interest payments are not included in GDP.

The GDP price index is a comprehensive indicator of inflation. It is typically lower than the consumer price index because investment goods (which are in the GDP price index but not the CPI) tend to have lower rates of inflation than consumer goods and services. Note that contributions of each component, as averaged over the prior year, are tracked in the table below (components do not exactly sum to total due to chain-weighted methodology). Consumption expenditures, otherwise known as consumer spending, has over history been steadily making up an increasing share of GDP.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Investors in the stock market like to see healthy economic growth because robust business activity translates to higher corporate profits. Bond investors are more highly sensitive to inflation and robust economic activity could potentially pave the road to inflation. By tracking economic data such as GDP, investors will know what the economic backdrop is for these markets and their portfolios.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Importance
Gross domestic product is the country's most comprehensive economic scorecard.

Interpretation
When gross domestic product expands more (less) rapidly that its potential, bond prices fall (rise). Healthy GDP growth usually translates into strong corporate earnings, which bode well for the stock market.

The four major categories of GDP -- personal consumption expenditures, investment, net exports and government -- all reveal important information about the economy and should be monitored separately. One can thus determine the strengths and weaknesses of the economy in order to assess alternatives and make appropriate financial investment decisions.

Economists and financial market participants monitor final sales -- GDP less the change in business inventories. When final sales are growing faster than inventories, this points to increases in production in months ahead. Conversely, when final sales are growing more slowly than inventories, they signal a slowdown in production.

It is useful to distinguish between private demand versus growth in government expenditures. Market players discount growth in the government sector because it depends on fiscal policy rather than economic conditions.

Market participants view increased expenditures on investment favorably because they expand the productive capacity of the country. This means that we can produce more without inciting inflationary pressures.

Net exports are a drag on total GDP because the United States regularly imports more than it exports, that is, net exports are in deficit. When the net export deficit becomes less negative, it adds to growth because a smaller amount is subtracted from GDP. When the deficit widens, it subtracts even more from GDP.

Gross domestic product is subject to some quarterly volatility, so it is appropriate to follow year-over-year percent changes, to smooth out this variation.