US GDP growth for the second quarter of 2025 has been updated to 3.3%, up from the previous estimate of 3.1%. Preliminary sales also improved, rising to 6.8% from 6.3%, and consumer spending increased from 1.4% to 1.6%. The GDP deflator and Core PCE Prices were in line with expectations, though Core PCE was slightly under the predicted 2.6%. The preliminary PCE prices were 2.0%, down from 2.1%, while PCE excluding food and energy remained stable at 2.2%.

Contributions to GDP Growth

Consumer spending added +1.07% to the 3.3% GDP growth. However, investment and government spending decreased by -2.70% and -0.03%, respectively. Net trade gave a notable boost to GDP, contributing +4.95%. When comparing the second quarter to the first, consumer spending rose slightly by +0.31%, while investment surged by +3.9%. In Q1, imports negatively impacted GDP, but in Q2 their rapid growth helped improve the situation. US stock market performance mirrored these changes, with slight gains in major indices. The Dow industrial average gained 80 points, the S&P rose by 3.35 points, and the NASDAQ index climbed 3.15 points.

Underlying Economic Weakness

Although the revised GDP figure of 3.3% looks impressive, it can be misleading. The growth was mainly due to changes in net trade, stemming from temporary shifts in inventory due to tariffs. The reality is that private investment is weak, and consumer spending remains modest, indicating that the economy might not be as strong as it seems. This underlying weakness is reflected in recent data, such as the July 2025 jobs report, which showed hiring slowed to 179,000 and the unemployment rate climbed to 4.0%. The ISM Manufacturing PMI for July also fell into contraction at 49.1, which aligns with the sharp decrease in business investment noted in this GDP report. We’ve seen strong headlines cover underlying issues before, like during the trade disputes in 2018 and 2019. The softer Core PCE inflation rate of 2.5% is a key figure. It eases pressure on the Federal Reserve to raise rates, especially after their cautious stance in July 2025. We should expect the market to price in a more dovish Fed, possibly favoring options on interest rate futures that benefit from stable or declining rates. With the economic growth factors looking skewed, the small rally in stocks today might present a chance to prepare for more uncertainty. We recommend buying volatility through VIX futures or index options in the coming weeks. Specifically, a weaker outlook for consumers suggests considering put options on consumer discretionary ETFs as a focused approach to capitalize on this expected slowdown. Create your live VT Markets account and start trading now.

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