Weekly Update 09/26/2025: US Second Quarter GDP Growth Gets A Revision Higher
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Domestic Economic News
The US economy grew in the second quarter at the fastest pace in nearly two years as the government revised its previous estimate of consumer spending up. Inflation-adjusted gross domestic product, which measures the value of goods and services produced in the US, increased at a revised 3.8% annualized pace, a Bureau of Economic Analysis report showed Thursday. That was stronger than the previously reported 3.3% advance and followed an outright contraction in the first quarter. The BEA also issued its annual update of the national economic accounts, which showed real GDP still increased at an average annual pace of 2.4% from 2019 to 2024. The revisions paint a picture of an economy that quickly rebounded from the initial shock of the pandemic and has since transitioned to a period of steadier, trend growth with lingering inflation. The latest quarterly GDP data confirm the economy rebounded in the second quarter after a monumental surge in imports at the start of the year, when companies were racing to stock up ahead of President Donald Trump’s tariffs. The third quarter is also looking solid, with recent reports illustrating resilient consumer spending and business outlays for equipment. “The economy is clearly recovering from the shock of tariff implementation,” Chris Low, chief economist at FHN Financial, said in a note. “Accelerating growth should mean stronger job growth within the next few months.” Before Thursday’s figures, the Federal Reserve Bank of Atlanta’s GDPNow estimate penciled in a 3.3% rate of growth in the July-September period. However, some economists are less upbeat about growth in the fourth quarter as weaker employment dims prospects for consumer spending. Forecasters expect activity to only pick up somewhat in 2026, partly due to Trump’s tax law and lower interest rates, with most forecasters expecting sub-2% growth for the next few years. Separate data for the month of August released Thursday showed orders for business equipment increased at a solid clip while the merchandise trade deficit narrowed by more than forecast.
US business activity expanded in September at the slowest pace in three months, while cooler demand limited the ability of companies to raise prices and offset tariffs. The S&P Global flash September composite output index fell 1 point to 53.6, according to data released Tuesday. Figures above 50 indicate expansion. While the group’s measure of prices paid for materials climbed to a four-month high, the prices-received gauge retreated to the lowest level since April. Input prices in the service sector rose to the highest since May. “Although tariffs were again cited as a driver of higher input costs across both manufacturing and services, the number of companies able to hike selling prices to pass these costs on to customers has fallen, hinting at squeezed margins but boding well for inflation to moderate,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement. A pair of S&P Global composite indexes showed the slowest growth in new orders and backlogs in three months. Measures of new business at service providers eased, while bookings at manufacturers barely expanded. As a result, the group’s composite employment index slipped to a five-month low. Slower sales growth for manufacturers also led to the biggest build-up in inventories of finished goods in data back to 2007, according to the report. Nonetheless, companies were more upbeat about the demand outlook for the year ahead, boosted in part by prospects for lower interest rates. Manufacturers remained optimistic that higher tariffs will propel domestic production.
New-home sales in the US unexpectedly surged in August to the fastest pace since early 2022, likely lifted by builders’ rampant price cuts and sales incentives to motivate buyers in a jittery economy. Sales of new single-family homes increased 20.5% to a 800,000 annualized rate in a broad advance, according to a government report issued Wednesday. The pace exceeded all estimates in a Bloomberg survey of economists. The surge in demand helped put a significant dent in what’s been a vast oversupply of new homes on the market. Last month, the inventory of new homes for sale decreased to 490,000 units, the lowest this year. The data suggest US homebuilders are successfully luring buyers off the sidelines with aggressive sales incentives. This month, 39% of builders reported cutting prices in a survey by the National Association of Home Builders and Wells Fargo, a post-pandemic high. Homebuilder Lennar Corp. recently reported offering sales incentives equal to 14.3% of its average sale price, more than double its usual 5% or 6%, Bloomberg Intelligence analyst Drew Reading said in a note. New home sales reflect contract signings, which likely take place at least a month before the transaction is complete. The figures capture the start of a recent slide in mortgage rates, that now stand at the lowest level in a year. Despite the improved August numbers, US homebuilders overall have been struggling to entice consumers, many of whom still can’t afford today’s prices and financing costs, and who are increasingly nervous about the nation’s labor market.
Sales of previously owned homes in the US slipped slightly in August, a sign that affordability constraints continue to grip the housing market. Contract closings fell 0.2% last month to an annualized rate of 4 million, according to National Association of Realtors figures released Thursday. Economists surveyed by Bloomberg anticipated 3.95 million. Sales have been stuck around the 4 million level since March. The median sales price, meantime, rose 2% from a year ago to $422,600, extending a string of straight year-over-year gains since mid-2023, NAR data show. Prices remain out of reach for many Americans, having risen more than 50% since the pandemic. “Home sales have been sluggish over the past few years due to elevated mortgage rates and limited inventory,” NAR Chief Economist Lawrence Yun said in a statement. “However, mortgage rates are declining and more inventory is coming to the market, which should boost sales in the coming months.” Mortgage rates have fallen over the past two months in anticipation that the Federal Reserve would start lowering interest rates again — which the central bank did last week. But economists predict the housing market will trudge along until the US sees deeper declines in borrowing costs, which are still almost double what they were at year-end 2021. The affordability crunch, however, is slowly easing. Two-thirds of the US’s most populous metropolitan areas were buyer’s markets last month, meaning sellers outnumber buyers by at least 10%, according to research from online housing marketplace Redfin.
Helping to temper price growth is a gradual increase in the supply of homes on the market this year. In August, the inventory of previously owned homes for sale fell for the first time in 2025, slipping 1.3% to 1.53 million, still near the highest in more than five years, NAR data show. The slight decline in homes for sale may reflect more sellers choosing to de-list their properties from the market, because they may not be fetching the price they want, Yun said on a conference call. Existing-home sales in the South, the country’s biggest home-selling region, decreased 1.1% to an annualized rate of 1.83 million. Sales saw gains in the West and Midwest, while they fell 4% in the Northeast. Individual investors or second-home buyers purchased 21% of homes last month, compared with 20% a month earlier. And, first-time buyers accounted for 28% of closings, unchanged from July. An increasing share of buyers are looking for work-from-home features — 36% compared with 30% a year ago — based on NAR data, Yun said. The National Association of Realtors will give another look at the previously owned home market on Monday with the release of its pending-home sales report for August. Existing homes typically go under contract a month or two before they’re sold.
Initial applications for unemployment benefits fell last week to the lowest since mid-July, underscoring how companies remain reticent to lay off workers. New claims decreased by 14,000 to 218,000 in the week ended Sept. 20, according to Labor Department data released Thursday. That was much lower than the median forecast in a Bloomberg survey of economists, which called for 233,000 applications. The decline in initial claims points to a labor market that — while cooling — has seen relatively limited layoffs. Most companies are choosing to hold onto workers even as lingering economic uncertainty keeps a lid on hiring. “Claims continue to run at a rate that is way too low to signal a recession,” said Carl B. Weinberg, chief economist at High Frequency Economics, in a note. “Today’s report refutes any theories that layoffs have suddenly taken off.” The four-week moving average of initial claims, a gauge that helps smooth out volatility, also fell, to 237,500. Meanwhile, continuing claims, a proxy for the number of people receiving benefits, were little changed at 1.93 million after the previous week’s data was revised up. Before adjusting for seasonal factors, initial claims dropped last week. Texas accounted for nearly half of the decline. Applications there had surged early September, which a state official said was due to increase in fraudulent claim attempts. Even after last week’s decline, claims remain higher than in August. Federal Reserve Chair Jerome Powell pointed to growing concerns about the labor market as why officials lowered borrowing costs for the first time this year. He said it can no longer be described as “very solid” and pointed to the slowdown in both the supply and demand of workers. “In this less dynamic and somewhat softer labor market, the downside risks to employment have risen,” Powell said Tuesday. We expand on his comments below.
The Bureau of Economic Analysis said that inflation-adjusted consumer spending rose 0.4% for a second month in August. The personal consumption expenditures price (PCE) index is a favorite of the Federal Reserve due to its thoroughness in covering many areas of the economy. The so-called core PCE, which excludes food and energy items, rose 0.2% from July. That resulted in a 2.9% yearly advance, which was inline with estimates taken in a Bloomberg survey of economists. Headline PCE advanced 2.7% on an annual basis, also inline with the median estimate. Personal income rose 0.6% in August versus the month prior suggesting that the consumer remains resilient.
Spending on merchandise climbed 0.7% for the month thanks to discretionary purchase like furnishings and recreational goods. Consumers were more tempered with their outlays for services coming in a 0.5%. A decline in the savings rate to 4.6% (form an upwardly revised 4.8% in July) is providing the fuel for consumers to continue to spend even in the face of a softening job market. The question is how long can this continue? On a one-, three- and six-month annualized base, core PCE inflation registered 2.8%, 2.9% and 2.5%, respectively. This shows that disinflation momentum is stalling as tariffs begin to bite consumers in the wallet. This is more food for thought for the Fed, which will have its next Federal Open Market Committee meeting near the end of next month.
Interest Rate Insight and the Fed
Federal Reserve Bank of Chicago President Austan Goolsbee said the US central bank should be cautious toward additional interest-rate reductions given inflation is above its target and on an upward trajectory. “Eventually, at a gradual pace, rates can come down a fair amount if we can get this stagflationary dust out of the air,” Goolsbee said Tuesday in an interview with CNBC. “But with inflation having been over the target for four-and-a-half years in a row, and rising, I think we need to be a little careful with getting overly, up-front aggressive.” Fed officials lowered interest rates by a quarter percentage point at their meeting last week, for the first time since December. Policymakers are penciling in two more quarter-point cuts this year, according to the median of their projections published after the meeting. Goolsbee said monetary policy is currently “mildly restrictive.” An analysis of the labor market by the Chicago Fed shows it’s stable right now, he added, pointing to low layoffs despite a slowdown in hiring.
Federal Reserve Chair Jerome Powell said the outlooks for the labor market and inflation face risks, reiterating his view that policymakers likely have a difficult road ahead as they weigh further interest-rate cuts. “Near-term risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation,” Powell said Tuesday in remarks to the Greater Providence Chamber of Commerce in Rhode Island. “Two-sided risks mean that there is no risk-free path.” Powell offered no hints on whether he might support a rate cut at the Fed’s next meeting, in October. He did, however, address the tense political environment surrounding the Fed during a question and answer session following his speech, and denied accusations the central bank has acted politically in its policy decisions. “We’re looking at what’s the best thing for the people that we serve,” he said. “Truth is mostly people who are calling us political — it’s just a cheap shot.” President Donald Trump — in addition to pressuring the Fed for lower interest rates — has been among Republicans who have accused Powell of making rate decisions that favored Democrats. Powell’s prepared remarks hewed closely to those he made in a press conference on Sept. 17 after Fed policymakers lowered the central bank’s benchmark interest rate to a range of 4%-4.25%, the first reduction of 2025. Powell at the press conference described the move as a “risk-management cut” aimed at responding to growing warning signs in the labor market. Recent data, along with revisions to previous figures, have pointed to a sharp slowdown in job creation that officials are trying to assess. That process has been complicated by a pullback in labor supply amid President Donald Trump’s stepped-up immigration enforcement policies. “There has been a marked slowing in both the supply of and demand for workers — an unusual and challenging development,” Powell said. “In this less dynamic and somewhat softer labor market, the downside risks to employment have risen.”
Still, Powell on Tuesday continued to argue the Fed must remain attentive to the possibility that Trump’s tariffs lead to persistent inflationary effects. He said recent price increases were largely being driven by tariffs, but he continued to expect that would be a “one-time” effect. “Powell wasn’t as dovish as markets were probably hoping for, somewhat mirroring his tone at last week’s press conference,” Oren Klachkin, an economist at Nationwide, said in a note after the speech. “But he still sees tariffs as a one-time adjustment to the price level, which should give him the green light to continue easing.” The challenge ahead for Fed policymakers is reflected in the wide range of views among officials over the best path for interest rates. In updated quarterly projections released following last week’s meeting, policymakers penciled in two additional quarter-point cuts this year, according to the median estimate. But several also saw one additional or no more cuts in 2025. Some policymakers have continued to advocate for a cautious approach to further rate cuts, given that inflation remains above the Fed’s 2% target.
Impactful International News
The euro area’s private sector expanded at the quickest pace in 16 months as outperformance in German services compensated for a slump in France. The Composite Purchasing Managers’ Index compiled by S&P Global rose to 51.2 in September from 51 in August, further above the 50 threshold separating growth from contraction. Analysts had predicted the reading would remain stable. The report revealed diverging fortunes in the bloc. France suffered amid another government collapse and the continued failure to agree on budget cuts. In Germany, by contrast, services equaled their fastest pace this year. Manufacturing was a weak spot for the 20-nation bloc as a whole, with the indicator moving back below the 50 threshold having only recently exited a years-long malaise “The euro zone is still on a growth path,” Cyrus de la Rubia, an economist at Hamburg Commercial Bank, said Tuesday in a statement. But “we’re still a long way from seeing any real momentum.” The region was clouded by uncertainty over President Donald Trump’s tariff policies in the first half of 2025. While activity benefited from front-loaded demand at the start of the year, a reversal of that trend pushed Germany into contraction in the second quarter. Here is what Bloomberg Economics had to say: “The rise in the composite PMI masks signs of weakness in the details. The survey suggests the manufacturing sector – a bellwether for the wider economy – is deteriorating and inflationary pressures are decreasing. That adds to similar indications in the details of the national accounts and the monthly trade reports. We think the ECB will eventually have to lower interest rates again to ease the blow.” — David Powell, senior euro-area economist.
German business confidence unexpectedly dropped, highlighting the fragility of Chancellor Friedrich Merz’s plan to restore growth in Europe’s biggest economy. After four months of gains, an expectations index by the Ifo institute dropped to 89.7 in September from a revised 91.4 in August, a release Wednesday showed. Analysts polled by Bloomberg had predicted an increase to 92. A measure of current conditions also fell. “In recent months, there was some optimism coming up because companies expected the government to spend more and they expected the new government to reform the economy,” Ifo President Clemens Fuest told Bloomberg Television. “Now companies realize a lot of the borrowed money is actually going to consumption to plug holes in the budget, and there are few plans for credible reforms.” The report is at odds with a separate survey this week from S&P Global showing private-sector activity picked up this month. Some economists cautioned, however, that the number may overstate the strength of the rebound. The government in Berlin is trying to bring an end to Germany’s underperformance after two years of shrinking output. But while it’s agreed on wide-ranging spending plans to bolster defense and modernize infrastructure, there’s concern about how the money is being spent. Companies also want more progress on initiatives like curbing bureaucracy. Fuest criticized plans to trim investments in the core budget just as Germany readies hundreds of billions of euros to upgrade roads and railways — meaning the latter won’t deliver the economic boost that had been hoped. “If that happens, the infrastructure investment will just not be forthcoming,” he said. “We also see that the government doesn’t really come up with plans to address the most pressing structural issues — for instance, pension reform.” Here is what Bloomberg Economics had to say: “The Ifo survey adds to evidence that the rise in US tariffs is weighing on the German economy. The headwind will probably lead to weak GDP growth in 3Q25. However, brighter times lie ahead – the boost from increased government spending should more than offset the drag from weak external demand next year.” — David Powell, senior euro-area economist.
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