Insights 
VT 
The US GDP estimate for the second quarter of 2025 has been revised to a growth rate of 3.3%, surpassing the earlier estimate of 3.1%. The preliminary sales for the second quarter increased to 6.8% from 6.3% previously, while consumer spending improved to 1.6% from 1.4%.
The GDP deflator and Core PCE Prices both recorded figures expected, with the latter slightly below the 2.6% estimation. For PCE prices, the preliminary figures stood at 2.0%, down from 2.1%, while PCE ex food and energy housing remained stable at 2.2%.
Contributions to GDP Growth
Consumer spending contributed +1.07% to the 3.3% GDP growth, whereas investment and government spending decreased by -2.70% and -0.03%, respectively. Net trade significantly enhanced GDP by +4.95%.
Comparing the second quarter to the first, consumer spending saw a slight increase of +0.31%, while investment growth jumped by +3.9%. Imports, initially detracting from GDP in Q1, contributed positively in Q2 as their rapid growth subsided.
US stock market performance reflected these changes with slight increases in major indices. The Dow industrial average rose by 80 points, the S&P increased by 3.35 points, and the NASDAQ index climbed 3.15%.
Underlying Economic Weakness
The revised GDP figure looks strong at 3.3%, but we see this is misleading. Growth was almost entirely driven by a massive swing in net trade, a temporary effect from prior tariff-related inventory shifts. The real story is weak private investment and modest consumer spending, suggesting the underlying economy is not as robust as the headline implies.
This weak internal picture aligns with other recent data we’ve been watching, like the July 2025 jobs report where hiring cooled to 179,000 and the unemployment rate ticked up to 4.0%. We also saw the ISM Manufacturing PMI for July dip into contractionary territory at 49.1, which supports the sharp drop in business investment seen in this GDP report. This pattern of a strong headline hiding underlying weakness is something we saw during the trade disputes back in 2018 and 2019.
The softer Core PCE inflation figure of 2.5% is the most critical number for us here. It reduces any pressure on the Federal Reserve to consider further rate hikes, especially after their cautious tone at the July 2025 meeting. We should be positioning for the market to begin pricing in a more dovish Fed, possibly looking at options on interest rate futures that would profit from stable or falling rates.
With the economy’s main growth engine looking distorted, the small rally in stocks today seems like an opportunity to position for increased uncertainty. We believe buying volatility through VIX futures or index options is a sensible move for the coming weeks. Specifically, a weaker consumer outlook suggests buying put options on consumer discretionary ETFs might offer a targeted way to play this expected slowdown.
