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We just got our first look at Q2 GDP growth and the results came in above expectations. The economy grew at an annual rate of 3.0% in Q2, while the street was expecting growth of 2.5%. A sharp recovery from the negative growth of Q1. But just as imports were a drag on Q1 growth, their easing in Q2 made the numbers look better then they really are.

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When we break it down by category, we see that imports were clearly the main driver of Q2 growth. Consumer spending, the most important category when tracking how the economy is performing, only contributed 1.0% to Q2 growth. Besides last quarter, it was the slowest pace of contribution to GDP since Q2 2023.

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Shown another way in the above chart, real consumer spending grew at an annual pace of only 1.4% in Q2. Well below the historical average of 2.31%, and the slowest quarter in two years.

Bottom line: the economy is not in recession, but its not booming either. It’s holding on for now, and as long as the labor market hangs in there, we may be able to avoid a recession all together.

Q2 earnings remain solid, but we are entering a period of unfavorable seasonality while the S&P 500 reached levels that matched the average annual returns. I’ll have more details on this later in the week.

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