"Q2 2025 - The Rocky Road"

GROSS DOMESTIC PRODUCT

• Aggregate GDP grew at a pace of 3.0% (SAAR) in Q2 2025, a drastic uptick from last quarter’s import-induced contraction of -0.50% and from Q4’s growth rate of 2.4%. Q2 2025 marks the 3^rd time in the last 5 quarters where aggregate GDP growth came in at or greater than 3.0%. As a reference, estimates of the long-term trend growth rate of the economy are roughly 2.0%^1,2
  • Consumption
    • Personal Consumption, the largest component of GDP, accelerated to a growth rate of 1.4% in the quarter – up from 0.50% in the prior quarter. Spending growth was positive across both Goods and Services components as well. Goods spending grew at a pace of 2.2% (up from 0.10% in the last quarter). Within the Goods component, Durable Goods spending advanced by 3.7%, a steep uptick from the prior quarter where spending contracted at a rate of -3.7%, due mostly to increases in Motor Vehicle spending of 16.3% and Other Durable Goods spending of 1.9%. Nondurable Goods also increased, coming in at a rate of 1.3% which was led by increases in Clothing & Footwear spending growth of 4.7% and Other Nondurable Goods spending growth of 2.8%. Consumer spending on Services also experienced an acceleration in the quarter, coming in at a growth rate of 1.1% (up from 0.60% in the last quarter). Within the Services component, standout areas included Healthcare spending of 3.0% (continuing a prolonged trend of robust growth in the category), Housing & Utilities contraction of -0.20%, a contraction in Transportation Services of -3.2%, and a return to growth for Food Service & Accommodations of 3.2% (a big turnaround from last quarter’s contraction of -1.8%)^1,2
  • Investment
    • The Private Investment component of GDP experienced a large reversal from last quarter’s abnormally high growth rate due to abnormal inventory ordering related to ‘tariff-front-running’. Private Investment contracted by -15.6%, a large reversal from the abnormal reading of 23.8% in the last quarter. Changes in Private Inventories were the primary driver of the contraction by falling -26B in the quarter (a very large difference from the abnormally high inventory additions of 160.5B in the prior quarter due to front-running tariff implementations). Nonresidential business investment expanded at a pace of 1.9% which was driven by increases in Software Spending of 18.3% and Transportation Equipment spending of 11.9%. Residential Investment fell for the second consecutive quarter, coming in at a contraction of -4.6% in Q2. Within Residential Investment, Single Family housing investment contracted at a pace of -12.6%, while Multi-Family housing investment fell by -1.3%^1,2
  • Net Exports
    • The U.S. Trade Deficit dropped by a staggering -25% in Q2 2025, coming in at a level of -1.026T, down from -1.359T in Q1. Keep in mind, Q1’s Quarterly Trade Deficit was the largest ever recorded as firms looked to mass import to ‘get in front’ of tariff implementations. U.S. Exports in Q2 were largely unchanged from Q1 levels, coming in at a contraction of just -1.8%; however, Imports to the U.S. dropped by -30.3% as firms had already ‘pulled forward’ their orders into the previous quarter^1,2
  • Government
    • Government Spending grew modestly in the quarter, coming in at a growth rate of 0.40%. Federal Government spending contracted at a pace of -3.7%, which was roughly in-line with last quarter’s contraction of -4.6%. Within Federal Government spending, National Defense spending advanced by 2.2% while Non-Defense spending contracted at a robust pace of -11.2%. State & Local Government spending accelerated slightly in the quarter, coming in at a growth rate of 3.0% (up from the prior month’s reading of 2.0%). ^1,2

EMPLOYMENT

• The Unemployment Rate for the U.S. Economy has remained steady and is now at a level of 4.2%, a level that is largely characterized as Maximum Employment be the Federal Reserve^1,3
  • Large downward revisions to June and May’s jobs data has injected fresh uncertainty over the state of the Labor Market, however post-adjustment readings for those months still remained positive on the whole^1,3

• Regarding the Labor Force, we have seen stagnation in the metric since the start of 2025. The Labor Force started the year at 170.7M and is now at 170.3M^,3
  • The Federal Reserve now characterizes the Labor Market as being more balanced relative to prior years and no longer views Labor Market conditions as a material source of inflationary pressures on the economy^1,3
  • The Labor Force Participation Rate remains below pre-pandemic levels and is now at 62.2%. Pre-Pandemic levels were roughly closer to 63%^1,3

• Within the Household Survey, the number of Employed Individuals, as well as Unemployed Individuals has remained steady on a year-to-date basis^1,3

• A key metric monitored by the Federal Reserve, Job Openings, have moderated significantly over the past 2 years, which is largely seen as a positive sign from the Fed that the Labor Market is back in better balance. Job Openings are down to 7.43M from the all-time high mark of 12.18M achieved in 2022^1,3
  • There are now 1.03 Job Openings available for every unemployed person^1,3
  • The number of Unemployed Persons currently stands at a level of 7.2M, an uptick from 6.1M seen at the start of 2024 – however has been stable on a year-to-date basis^1,3
  • Regarding the Labor Market’s effect on overall Inflationary Pressures, the Fed now officially no longer sees an abnormally unbalanced Labor Market as being a contributor to inflationary pressures^1,3
    • (Federal Reserve) “With regard to the outlook for the labor market, participants noted that further cooling did not appear to be needed to help bring inflation back to 2 percent”^1,3
• Average Weekly Earnings are up 3.43% over the past year^,3
  • Over the past year, Average Weekly Earnings increases have been entirely attributed to increases in Wage Growth as opposed to Hours Worked^1,3
  • Elevated Wage Growth, in tandem with consumer substitution effects, have been instrumental factors in allowing U.S. consumers to partially offset the effects of higher Inflation^1,3
    • Headline CPI Inflation has been 2.7% over the past year, indicating that Wage Growth has outpaced Inflationary pressure over this time period^1,3

INFLATION

• Headline CPI Inflation expanded in the month of July at an annualized rate of 2.40%. July marked a deceleration of price increases from June’s reading of 3.5%. Additionally, July’s CPI reading is below the average reading over the past 12 months, which came in at about 2.7%^1,4
  • Core CPI Inflation rose in the month of July at a pace of 3.8%, which constituted an acceleration from the prior 2 months’ readings of 2.8%, and 1.6%^,4
  • Paradoxically, the recent uptick in Core CPI has come mostly from Core Services rather than increases in Goods prices, directly going against the narrative of tariff impacts contributing to higher costs in the month of July.^1,4
  • Core Services inflation came in at a pace of 4.5% in July, which represented an acceleration from the prior 2 months’ readings of 3.1% and 2.1%^1,4

• Areas of interest in the Core Services section of the CPI report that have been the primary causes of Core CPI Inflation in the past few months are as follows: ^1,4
  • Rent increased to a level of 2.9% in July from 2.1% the prior month^1,4
  • Water/Sewer/Trash Collection services increased to a level of 5.4%, up from 3.0% in May^1,4
  • Medical Care Services rose significantly to a level of 9.9% in July from being just 2.1% in May. Dental Services has been the primary culprit here, inflating at a pace of 35.8% in July and 16.8% in June^1,4
  • Transportation Services jumped to a level of 9.8% in July, up from a contraction of -2.4% in May. Airline fares rising by 60.9% in July was a major factor in recent inflation for this segment^1,4

• Market Expectations of future inflation levels have been extremely stable since the mid-point of 2022, a potentially welcome sign for the economy as expectations of future inflation have historically been closely correlated with actual inflation to come^5,6
  • Market Expectations for future Inflation on a 5yr forward looking basis have been rangebound between 2.0% and 2.5% since 2022. Q1 did see a downtick in the market’s expectations of 5yr inflation, dropping from the 2.5% all the way to 2.2%^5,6
  • Market Expectations for future Inflation on a 10yr forward looking basis have also been rangebound between 2.0% and 2.5% since 2022. The same downward trend in forward looking expectations exhibited in Q1 for 5yr inflation was also mirrored in the 10yr inflation metric⁵

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

ANNOTATIONS

1. FactSet. “Economics – Country/Region – United States”. August 12, 2025
2. Bureau of Economic Analysis. “Gross Domestic Product, 2nd Quarter and Year 2025 (Advance Estimate)”. August 12, 2025.
3. Bureau of Economic Analysis. “Labor Force Statistics from the Current Population Survey”. August 12, 2025.
4. Bureau of Economic Analysis. “Personal Income”. August 12, 2025.
5. FRED. “5-Year Breakeven Inflation Rate”. August 12, 2025.
6. FRED. “10-Year Breakeven Inflation Rate”. August 12, 2025.