U.S. GDP "false prosperity": Plummeting imports boost overall growth, but core demand growth rate plummets

The apparent growth of the U.S. GDP in the second quarter is impressive, but a deeper analysis reveals that this prosperity is deceptive. The significant shrinkage in imports artificially inflated the overall data, masking the fact that domestic demand is clearly slowing down.

According to the Chasing Wind Trading Desk, Morgan Stanley's latest report indicates that the U.S. GDP grew at an annualized rate of 3.0% in the second quarter, exceeding the market expectation of 2.5%, but this figure is severely distorted by trade factors. Actual imports plummeted by 30.3% in the second quarter, largely offsetting the 37.9% surge in the first quarter, artificially boosting the overall GDP data.

As a core indicator reflecting the endogenous momentum of the economy, the growth rate of domestic private final purchases has sharply dropped from 2.7% a year earlier to 1.2%, indicating that signs of cooling are already evident within the U.S. economy.

The report warns that the dramatic fluctuations in trade data obscure deeper trends of economic slowdown. Consumption growth has significantly weakened from robust levels in 2024, and both residential and commercial investments are showing weakness, indicating that household and business spending are cooling simultaneously.

Trade Fluctuations Mask Economic Slowdown

Morgan Stanley points out that the 3.0% GDP growth in the second quarter appears strong on the surface, but this figure is severely distorted by abnormal fluctuations in trade flows. After a 37.9% surge in imports in the first quarter due to tariff expectations, imports sharply fell by 30.3% in the second quarter, contributing 5.0 percentage points to GDP growth from net trade.

"Focusing on the final domestic sales data, it is evident that economic activity is slowing down," said Michael Gapen, Chief U.S. Economist at Morgan Stanley. "Final domestic sales growth in the second quarter was only 1.1%, slightly lower than the 1.5% in the first quarter, and far behind the growth rates of 3.4% in the second half of 2024 and 2.8% in the first half."

Inventory changes absorbed most of the fluctuations in trade flows. In the first quarter, inventories contributed 2.6 percentage points to GDP growth, while in the second quarter, they dragged down by 3.2 percentage points, further proving the distortion of the underlying economic data.

Core Demand Significantly Slows Down

The core indicator that better reflects the endogenous momentum of the economy—private final domestic purchases—has seen its growth rate drop sharply from 2.7% a year earlier to 1.2%, indicating that both household consumption and business investment are cooling.

In terms of consumer spending, although real personal consumption rebounded from 0.5% in the first quarter to 1.4%, it is still significantly below 2024 levels. Durable goods consumption is mainly supported by automobile sales (up 16.2%), while service consumption only slightly rebounded to 1.1%, remaining in a relatively weak state.

"We believe that the good income and savings situation in the second quarter could have supported faster consumption or residential growth, but uncertainty and negative outlook for the second half have suppressed spending," the Morgan Stanley report noted

Investment Slowdown and Policy Uncertainty

Non-residential fixed investment growth significantly slowed in the second quarter, particularly as construction investment fell further by 10.3% after a 2.4% decline in the first quarter. Residential investment also shifted from a slight decline in the first quarter to a 4.6% drop in the second quarter.

Surprisingly, business investment related to artificial intelligence also fell short of expectations. Investment in power plants declined, and data center and IT investments slowed, contrasting sharply with the optimistic forecasts of many analysts.

"We suspect that the volatility of tariffs and trade policies has increased uncertainty, leading the private sector to postpone its capital expenditure plans," the report noted. "This uncertainty has resulted in the investment performance in the second quarter seeming somewhat inconsistent with the optimism in the stock market."

Economic Slowdown Trend to Continue

Despite the second quarter GDP data exceeding expectations, Morgan Stanley maintains its forecast for a slowdown in the U.S. economy, believing that the negative impacts of restrictive trade and immigration policies will outweigh the benefits brought by fiscal policy and deregulation.

Morgan Stanley predicts that the year-on-year growth rate will reach 1.0% in the fourth quarter of 2025, with growth expected to be 1.1% in 2026, far below the strong performance of 2024.

In terms of inflation, the core PCE price index rose at an annualized rate of 2.54% in the second quarter, higher than expected, indicating that price pressures remain