The U.S. economy grew at a faster pace in the second quarter of 2025 than previously estimated, driven in part by surging business investment in artificial intelligence (AI) and intellectual property. The revised data from the Commerce Department shows the gross domestic product (GDP) expanded at an annualized rate of 3.3%, compared to the initial estimate of 3.0%.
This upward revision also reflects stronger-than-expected consumer spending and increased business investment in equipment, offsetting pressures caused by the U.S. administration's tariff policies. "The strength in economic growth last quarter remains a mirage that is based on the fallout from the administration's economic agenda", said Christopher Rupkey, chief economist at FWDBONDS. "Economic growth will slow to stall-speed once the tariff effects on imports wash out in the third quarter."
Investment in intellectual property products, particularly related to AI, emerged as a key contributor to the robust GDP figure. Business spending in this sector expanded at an impressive 12.8% annualized rate, double the initial estimate of 6.4% and marking the fastest growth in four years. Similarly, business investment in equipment saw a significant upward revision, climbing to a 7.4% pace from the previously reported 4.8%.
Ryan Sweet, chief economist at Oxford Economics, highlighted the role of AI in bolstering the economy amid broader challenges. "Investment related to AI is helping mask some of the weakness elsewhere in the economy, but the good news is that there is little sign that this support is set to fade anytime soon", Sweet said.
Consumer spending, which remains the primary engine of the U.S. economy, also received a modest boost in the revised figures. Growth in this area was adjusted upward to a 1.6% annualized rate, compared to the previously reported 1.4%.
Despite the strong revisions, concerns linger over the economic impact of the U.S.'s elevated tariff policies, which have reached their highest levels in a century. Economists warn that the full weight of these duties could drag down growth in the near future. The second quarter gains followed a sharp contraction of 0.5% in the first quarter, which was partly attributed to a front-loading of imports ahead of tariff increases.
"The nation's average tariff rate has jumped to its highest level in a century, inflicting pain on companies ranging from manufacturers to retailers", the report noted. Corporate giants such as Caterpillar, General Motors, and Abercrombie & Fitch have already reported substantial financial losses tied to the duties. Caterpillar, for example, warned that tariffs could cost the company up to $1.5 billion this year.
Corporate profits rebounded in the second quarter, rising by $65.5 billion after a $90.6 billion decline in the first quarter, despite the higher tariff costs. Core profit margins remained stable at 20.8%, a surprising outcome given the increased expenses. "Profit margins are a leading indicator and causal driver of recessions, and there is no indication yet of the pressures that would induce companies to shake out labor", said Conrad DeQuadros, senior economic advisor at Brean Capital.
Meanwhile, the labor market showed subtle signs of cooling. Initial claims for unemployment benefits decreased by 5,000 to a seasonally adjusted 229,000 in the week ending August 23. Continuing claims, a proxy for hiring activity, fell by 7,000 to 1.954 million during the week ending August 16. However, reduced labor supply due to immigration restrictions is keeping hiring demand in balance with the workforce's slow growth.
Looking ahead, economists expect a sluggish second half of the year, with an anticipated GDP growth rate of just 1.5% for 2025, down from 2.8% in 2024. The Federal Reserve, which has maintained its benchmark interest rate in the 4.25%-4.50% range since December, may consider an interest rate cut in response to labor market risks, as indicated by Fed Chair Jerome Powell last week. However, inflation remains a factor in their decision-making.
While AI investments have provided a notable uplift to the economy, broader challenges, including tariffs and a gradually tightening labor market, could weigh on growth in the months ahead.
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