The Economy Beat Expectations Last Quarter, and It’s Better and Worse Than It Looks

But structural issues still persist. The bad news embedded in the second quarter economic numbers is that business investment is still weak. “Businesses are very cautious—they don’t know the road map and so they’re driving in the right lane very slowly,” said U.S. Bank chief economist Beth Ann Bovino to the Wall Street Journal. That road map is being laid out by president deals, who just agreed to elevated tariff rates with two of our largest trading partners to establish his legacy as the man who instituted the highest tariff rate since 1934, a year we all famously know and love for the great economy it brought us.

The second quarter unemployment rate remained steady at 4.1 percent, in line with the 2000 lows just before the tech bubble burst and slightly above the previous lows of 3.5 percent in 1969, right before the yo-yo inflation of the 1970s that Trump wants to emulate which gave us a lost decade and birthed a generation of reactionary Reaganites. The labor market is in a stasis right now. Businesses are not laying off workers and the unemployment rate is historically low, but the net effect of Trump’s shambolic tariff gambit has been to chill long-term investment and so hiring has slowed way down, bringing the rest of the economy into the sludge with it. Trump has changed his TACO tariff tune on a weekly basis, and firms cannot invest for the long-term in that kind of environment. Hiring people and buying equipment and building factories is planned over a long time period, much longer than Trump’s cable news-addled brain can comprehend.

And this reality is showing up in economic figures this year. Trump pointed to the big 3 percent headline number this morning and said that this is why the Fed needs to lower rates (they are not going to lower rates today, maybe next meeting in September), but business are putting their money where their anxiety is (or more accurately, not putting their money there), because economic gyrations take a long time to establish themselves, and every big brained economic expert is concerned that Trump’s historic surcharge on American imports will lead to inflation roaring back the way it did in the 1970s. Lowering interest rates like they did in the 1970s just exacerbated the problem, and then they had to raise rates when inflation returned, further distorting and hampering a weakening economy. This ended with the Volcker shock of the early 1980s, where Fed Chair Paul Volcker raised rates to 19 percent, doing everything he could to crush any kind of economic growth and inflation along with it.

Yes, the economy is growing, but it’s not being driven by overall business investment. That is the weakest part of the second quarter economic data outside residential and federal government investment. Businesses spent heavy in the first quarter to front-run Trump’s tariffs, and they cut back in the second quarter now that they stocked up on pre-tariff inventory. Bovino told WSJ that U.S. Bank expects weak business investment to continue into the third quarter too, so what could be fueling the boost in economic growth in the second quarter?

Consumer spending boosted by the stock market’s wealth effect being goosed by AI investment. And like our society defined by historic inequality, the stock market is driven by a small cadre of powerful interests. The blended earnings growth rate for the S&P 500 in Q2 was 5.6 percent, but just 3.4 percent without the magnificent seven of Apple, Microsoft, Nvidia, Alphabet, Meta, Amazon and Tesla included. A study earlier this year from Moody’s Analytics titled “The U.S. Economy Depends More Than Ever on Rich People” found that the top ten percent of earners “account for 49.7 percent of all spending, a record in data going back to 1989.” The stock market is elevated by immense capital expenditure spending by the megacap tech firms, who are creating returns that the richest Americans are using to help prop up GDP on the back of the second most expensive stock market in history. The good news for GDP is that Meta, Amazon, Alphabet and Microsoft said they intend to spend $320 billion combined on AI tech and datacenter buildouts this year, up from $230 billion in 2024.

4.1% NGDP growth in the 2010’s was like a 53-degree day in April. It’s not warm, but you’re not freezing. 4.1% NGDP growth in the middle of an AI boom is like having a blast furnace running in an otherwise unheated Minnesota house in winter — you’re grateful for the heat but screwed if it breaks.

— Conor Sen (@conorsen.bsky.social) July 30, 2025 at 9:14 AM

The takeaway from two quarters of economic data under Trump 2.0 is that the American economy is very resilient, but it is battling some serious problems under the hood and is extremely dependent on this AI capex boom eventually translating into actual economic growth and increased productivity. The housing market had its worst year in 30 years in 2024, and it doesn’t look like 2025 will be any better. We also now have a president whose official economic policy is to establish a hurricane of uncertainty and chill overall business investment. Trump could fire Jerome Powell tomorrow, appoint himself Fed Chair and lower the Fed Funds Rate to zero and it wouldn’t change anything about business investment so long as he keeps kicking the can on negotiations with China down the road. Europe is a big deal to get done, and Japan is important too. Establishing agreed-upon historically high tariff rates will help to unleash some business investment held back entirely by Trump’s uncertainty, but China is the whole ballgame on trade, and these tariffs will still create some kind of economic drag because that’s what they did in 1934 and in the protectionist era that broke down before it. Until businesses know what the plan is, they will not do what Trump wants them to do and invest in America, and we will keep getting conflicting economic data—assuming the AI boom continues into infinity. I’m not sure we want to find out what happens if that bubble bursts.