What’s behind the GDP numbers (revisited)?
Popping the hood
Back in May, when the Bureau of Economic Analysis (BEA) announced that “Real gross domestic product (GDP) decreased at an annual rate of 0.3 percent in the first quarter of 2025 (January, February, and March),” many commentators pinned it on the actions of the Trump administration. Today, the BEA announced that:
Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the second quarter of 2025 (April, May, and June), according to the advance estimate released by the U.S. Bureau of Economic Analysis. In the first quarter, real GDP decreased 0.5 percent.
One wonders what those commentators are saying about this?
Let us take a closer look at these numbers.
What is GDP?
Maybe the most basic question is “What is GDP?” As I wrote in May:
To quantify domestic production of goods and services, GDP measures spending and this typically falls into four categories: personal consumption expenditures (C); gross private investment (I); government purchases (G); and net exports (X – M), composed of exports (X) minus imports (M). If you’ve studied macroeconomics at any level, you’ll probably recognize this equation:
GDP = C + I + G + (X – M)
To the layperson, this might suggest that we would be better off with a lower level of imports. As I noted in May:
That, after all, is what the GDP equation above seems to say: Imports (M) are subtracted. If you spend $45,000 on an imported car, the equation seems to imply that $45,000 should be subtracted from GDP.
But GDP is trying to measure domestic production, so imports — foreign production — should not be counted towards GDP. So, if you spend $45,000 on a foreign car that shows up in “Personal consumption expenditures,” but it is not domestic production so it has to be removed from GDP by subtracting the $45,000 in the “Exports” category. It is a question of accounting.
And, if a business buys a foreign car, that shows up in Investment.
What just happened?
The BEA breaks down the changes in real GDP into the changes in these five categories, splitting out Imports and Exports. The BEA writes:
The increase in real GDP in the second quarter primarily reflected a decrease in imports, which are a subtraction in the calculation of GDP, and an increase in consumer spending. These movements were partly offset by decreases in investment and exports.
Compared to the first quarter, the upturn in real GDP in the second quarter primarily reflected a downturn in imports and an acceleration in consumer spending that were partly offset by a downturn in investment.
So, whereas in the first quarter of 2025 Investment surged and so did Imports — a negative, remember — and that explained the changes in GDP, in the second quarter it is different: Now we have a decline in both Investment and Imports with the former pushing GDP down and the latter up.
These swings in Investment and Imports in the last couple of quarters are unusual. To get some idea of how unusual, Figure 1 shows the “Contributions to Percent Change in Real Gross Domestic Product” of the five categories for both the second quarter of 2025 — seen in the BEA chart above — and the median amount since the first quarter of 2017. While the changes in Consumer spending, Government, and Exports in the first quarter of 2025 are in the same ballpark as the median since the first quarter of 2017, the numbers for Investment, which is way down, and Imports, which is way up (but is a negative, remember), are a good deal off it. I described the first quarter numbers as “wacky,” and I’d say the same about these.
Figure 1: Contributions to Percent Change in Real Gross Domestic Product
Is there a less “wacky” measure? As I wrote in May:
I am not generally a fan of shopping around for data when there is a commonly accepted official series…But Jason Furman, chair of the White House Council of Economic Advisers under President Obama, wrote this week of “core” GDP, “the figures that reflect consumer spending and private investment.” This shows up in the BEA data as “Real final sales to private domestic purchasers…”
As Figure 2 shows, this increased by 1.2% in the second quarter of 2025, below the 1.9% of the pervious quarter and the median rate of 2.6% since the first quarter of 2017.
Figure 2
Let us hope that this number starts moving the other way.