Big swings in trade deficits and trade talks weigh on the economy

People shop at a store in Manhattan. Trade wars are raising prices on some goods such as clothes, but inflation more broadly hasn’t increased much.

GDP might show a big pop on Wednesday, but not because the U.S. economy has gotten much better. It hasn’t.

Here’s how to scope out the second-quarter report on gross domestic product, the official scorecard for the economy.

Look past the headline

GDP is forecast to show a 2.4% increase in the second quarter, the three-month period covering April to June. Some Wall Street estimates top 4.0%.

Good stuff, to be sure, but misleading.

The big pop is expected because the U.S. trade deficit fell sharply in the second quarter. A lower trade gap helps GDP.

By contrast, a record trade deficit in the first quarter dragged GDP into negative territory for the first time in three years.

Why such big ups and downs? The Trump administration’s on-again, off-again tariffs.

The trade deficit spiked, then receded, due to businesses and consumers trying to buy imports when tariffs were lower and avoid them when tariffs were higher.

As such, the trade wars have distorted the GDP headline number. They’ve also made it harder to figure out what’s going on in the real economy.

“Trade was a big negative for U.S. growth in the first quarter of 2025 as imports surged,” noted economist Ershang Liang of PNC Financial Services. “With the trade deficit shrinking, trade will be a positive for GDP growth in the second quarter.”

The numbers that count

There are a couple of ways to assess how well the economy is really performing.

One simple trick is to take the GDP for the first and second quarters and find the average. Let’s say GDP actually grew 2.4% from April to June, as economists polled by the Wall Street Journal predict.

Combine that increase with a 0.2% decline in first-quarter GDP, and it would show an average growth rate of 1.2%.

It’s not terrible, but it’s well below the economy’s performance in the past few years. And well below what it is capable of.

Economists believe the U.S. can grow almost 2% a year in the long run when it’s operating at peak efficiency.

Digging even deeper

The best way to look at the U.S. performance in the second quarter is to focus on a geeky number known as ”final sales to private domestic purchasers.”

What’s this? A number that excludes trade deficits, inventories and government spending, all of which can heavily distort headline GDP.

This tells us how much American households and businesses spent in the quarter. These are the two main drivers of the U.S. economy.

These so-called final sales rose a respectable 1.9% in the first quarter, negating the idea that the economy actually contracted.

One caveat: Some of the increase reflected accelerated corporate spending to beat the tariffs.

Economists predict a much smaller increase in the second quarter, a sign the economy slowed during the height of the trade wars.

Consumers are always key

The biggest number in the GDP report is normally consumer spending, which accounts for 70% of the economy.

Outlays are forecast to show an increase of 1.0% to 1.5%. versus a meager 0.5% in the first quarter.

Again, not great, but not bad. It would show consumers are stable amid the trade wars.

Another increase below 1%, however, could raise alarm bells. If that were the case, though, Federal Reserve might cut interest rates more aggressively and potentially help sustain the current stock-market rally.