By Tom Ozimek
The U.S. economy expanded at a 3.3 percent annualized pace in the second quarter of 2025, the Commerce Department reported on Aug. 28, with the rate of growth exceeding an earlier preliminary estimate and signaling economic strength despite headwinds such as high borrowing costs.
The reading was higher than the initial “advance” estimate of 3 percent released by the Commerce Department on July 30. It also beat the 3 percent Bloomberg consensus forecast.
The increase in consumer spending, the main engine of growth, was revised up to 1.6 percent from 1.4 percent, helping push the overall gross domestic product (GDP) number higher.
Business investment also came in firmer, helping offset weaker government outlays and a higher import tally, which subtracts from GDP.
A key gauge of underlying private demand—real final sales to private domestic purchasers—rose by 1.9 percent, revised up from 1.2 percent, suggesting households and companies were spending more robustly than first thought.
Price pressures eased slightly. The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, advanced at a 2 percent annualized rate, down from the previously estimated 2.1 percent. Excluding food and energy, “core” PCE inflation held at 2.5 percent.
The revisions reinforce the view that President Donald Trump’s tariff policies have had limited pass-through to consumer prices, consistent with the administration’s claim that businesses and foreign producers are absorbing most of the costs.
Fed Rate Cut Prospects
The softer inflation reading, alongside firmer consumer demand, also feeds into the debate over the Federal Reserve’s next move on interest rates. The Fed has kept its benchmark rate between 4.25 percent and 4.5 percent since December 2024, with Trump and others in his administration calling for a rate cut to lower government debt servicing costs and to give consumers and businesses a break from high borrowing costs. Some analysts say that the latest GDP revisions weaken the case for an urgent rate cut.
“I doubt this moves the needle for the Fed, but at the margin, these revisions work against the case for urgency to cut rates,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.
Recent retail sales data show consumers remain resilient, with July sales up 0.5 percent after a revised 0.9 percent gain in June. Inflation, meanwhile, held at 2.7 percent year-on-year in July, above the Fed’s 2 percent target. That mix of steady demand and sticky inflation makes an outsized half-point rate cut at the central bank’s September meeting less likely, analysts at ING wrote this month, despite Treasury Secretary Scott Bessent’s push for a more aggressive move.
Bessent told Bloomberg in mid-August that rates “should probably be 150, 175 basis points lower,” noting that the Fed “could have had rate cuts in June and July” if policymakers had been aware of the full extent of the labor market cooling.
The Labor Department on Aug. 1 reported that payrolls rose by 73,000 in July, short of the roughly 100,000 forecast. Even more striking, May’s gain was cut to 19,000 from 144,000, while June’s was reduced to 14,000 from 147,000. The 258,000 downward revision drags the three-month average to 35,000, pointing to a sharp loss of hiring momentum.
However, labor market data released on Aug. 28 point to economic resilience and a labor market that is holding up. Initial jobless claims fell by 5,000 last week to 229,000, while continuing claims dropped by 7,000, signaling employers remain reluctant to shed workers.
In light of the recent economic data, markets overwhelmingly expect a smaller 25-basis-point cut when Fed policymakers meet in several weeks to decide on interest rates.
With two months of data already in for the July–September period, the economy is tracking at a 2.2 percent growth pace in the third quarter, according to the Atlanta Fed’s GDPNow model.
Reuters contributed to this report.
