Real GDP grew 0.7% in Q2, or a 2.8% annualized rate, a perfectly good number in line with the past three years:

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Probably even more importantly, the GDP deflator increased 0.6% for the quarter, or at an annualized rate of 2.3%. As the below graph shows, this is a perfectly normal rate going back to the start of the Millennium:

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In other words, if 2% inflation is a target and not a ceiling, the Fed need not wait any further before starting to trim interest rates lower.

And the long leading indicators contained within the GDP report ought to give them more reason to cut, because both declined slightly.

First, private fixed residential investment as a share of GDP, a proxy for the housing market, declined slightly both in nominal (blue) and real (red) comparisons:

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This doesn’t scream recession, but the generally flat trend of the past several years (with the supply chain tailwind now gone) at very least suggests lackluster growth ahead.

Secondly, real deflated proprietor’s income, a proxy for corporate profits (which won’t be reported for another month, also declined, by -0.4%:

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Business profitability is also not providing any help to the economic outlook for 2025.

Continued resilient real consumer income and spending is keeping the economy growing. But the power sources for that engine are not providing any more juice. 

Again, not recessionary, but more evidence that the Fed should start to lower rates now.

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