U.S. growth in the second quarter most likely advanced at a 2.5% rate following the 0.5% contraction in the first quarter of the year.
The top-line data in the first half of the year was distorted because of tariffs, trade policy and inventory accumulation to the point that growth was understated in the first quarter and most likely overstated in the second quarter.
Real final sales and final sales to private domestic purchasers excluding trade and inventories will provide better insight into the condition of the American economy through the first half of the year. We expect the economy to grow closer to 1% in the second half of the year
That forecast is tempered by an expected slowdown in inventory accumulation by private domestic firms to avoid tariffs.
In particular, the pulling forward of equipment purchases through the first three months of the year will cause a slowing in gross private investment if not an outright contraction in the second quarter.
To put that in perspective, the net drag on growth in the first quarter caused by a wider trade deficit was 4.61% while inventory accumulation bolstered GDP by 2.59%, which was fueled by a 23.7% advance in equipment purchases.
None of that will be sustained.
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Growth in the first half of the year should come in at 1%, down from the 2.9% pace at the end of last year and in line with our forecast of 1.1% for this year.
Because of those distortions, we would advise investors and policymakers to look more closely at real final sales, which declined by 3.1%, final sales to domestic purchasers, which advanced by 1.5%, and final sales to private domestic purchasers excluding trade and inventories, which grew by 1.9%.
The last of those three metrics is likely to arrive near 1% and in our estimation will capture the true condition of the American real economy as it entered the second half of the year.
Later in the current quarter, gross domestic income will provide further guidance after advancing at a soft 0.2% pace in the first quarter. We expect something closer to 1% to 1.5% when we get that data.
