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Was This the Strangest GDP Report Ever? Let’s Dissect the Frankenstein Economy

• Q2 GDP hit 3%, but most of the strength came from falling imports - not rising demand - while investment and consumer momentum softened.
  
  
• Looking ahead, fresh trade deals and Trump’s OBBBA stimulus could fuel a rebound in business spending and global capital inflows in Q3.

What you need to know: Q2 GDP hit 3%, but most of the growth came from trade math, not real momentum. Still, the report significantly beat expectations and showed that the peak of the trade war wasn’t impending doom¹. 

Why it matters: At first glance, 3% GDP growth sounds like a win. But most of that came from falling imports, not rising output. It’s a reminder that GDP is a blunt metric - sometimes inflated by quirks in trade math rather than true economic momentum. Beneath the headline, business investment stalled, consumers cooled, and government spending declined. That’s not a recession, but it’s not a boom either. In a quarter shaped by trade wars, fiscal policy, and business uncertainty, what we’re left with is more questions. 

Now the Deep Dive: This may be one of the weirdest GDP reports we’ve seen.

If you remember, we mentioned in the Dunham Quarterly Pulse: Q2-25 Edition that GDP could surprise to the upside - not because of booming demand, but because of a collapse in imports. And that’s exactly what happened.

• Remember that GDP subtracts imports from exports. So when imports fall relative to exports, GDP mechanically rises. It doesn’t necessarily mean we’re exporting more — just that we’re buying less from abroad.

In Q2, we saw the full effect of this. Imports plunged more than 30%, thus net exports added a whopping 4.99% to headline growth.

That alone helped push growth to 3% - nearly a full point above expectations, and a sharp rebound from Q1’s –0.5% decline.

So, all good? Well - yes and no.

As always, the devil's in the details.

The Good:

• The goods trade gap narrowed 10.8% to $86B - the smallest since September 2023 - thanks to plunging imports².
  
  
• Headline GDP hit 3%. That’s a solid print - especially considering this came during peak trade war uncertainty.
  
  
• Inflation softened. The price index for domestic purchases rose just 1.9%, down from 3.4% in Q1.
  
  
• Meanwhile, the Fed’s favored inflation gauge - the core PCE price index - cooled to roughly 2.5% year‑over‑year in Q2 2025, down from 3.5% in Q1 (edging closer to the Fed’s 2% target and boosting the case for eventual rate cuts).

The Bad:

• Private domestic investment fell 15.6% as business leaders hit pause. And when business leaders pause, it’s not a good sign - especially after a Q1 surge.
  
  
• Inventories subtracted 3.17% from growth - the biggest drag since 2020. Companies front-loaded earlier in the year and hit the brakes in Q2.
  
  
• The GDP data showed residential investment declined an annualized 4.6% - the weakest pace since 2022 – due to an affordability crisis in the housing market.

The Ugly:

• Consumer spending added just 0.98% to GDP - underwhelming for an economy powered by consumption.
  
  
• Final sales to private domestic purchasers rose just 1.2%, the slowest since late 2022.
  
  
• Sure, falling imports may have padded Q2 GDP, but it’s more of a statistical quirk. Eventually, these firms may need to restock at higher prices via tariffs – which could pressure margins.
  
  
• Federal spending declined again, led by non-defense cuts - part of the Trump administration’s downsizing push. And although cutting back spending is “good”, less government spending = less income for the private sector. That drag could show up in jobs and consumer demand later (especially since a lot of the hiring has been government jobs post-2020).

Other Things of Note:

•  Trump’s One Big Beautiful Bill Act (OBBBA) passed in late Q2. It's packed with business incentives that could jumpstart private investment in the second half.
  
  
• Globally, the U.S. inked major (and interesting) trade deals — such as Japan pledging $550B across sectors like semiconductors, energy, and AI - and the E.U. committed $600B in investment and $750B in defense and energy purchases.

So, while there’s no recession in this report - there’s no boom either.

I guess I would call it Frankenstein's monster – part math trick, part policy gamble, and part consumer slowdown.

Either way, I will keep you updated on what’s happening next.

 Figure 1: Bloomberg, July 2025 

When Tranquility Turns Toxic? Why August and September Might Rattle Markets  

• Markets are high on calm and confidence - but history shows September often breaks that spell.
  
  
• When complacency peaks and greed dominates, even a small shock - like a renewed trade war or missed earnings reports - can trigger outsized volatility.

What you need to know: As of writing this on Tuesday, July 29^th, Markets are hovering near record highs. Volatility is falling towards one-year lows. And sentiment is greedy. But history suggests this kind of calm doesn’t last. Late summer - especially September - has a habit of shaking things up. 

Why it matters: Today’s market is running on low volatility, retail FOMO, meme-stock mania, and peak optimism. But froth like this often plants the seeds of its own undoing. Historically, the August–October stretch - and September in particular - has been one of the weakest for equities⁵. With greed peaking and prices stretched, volatility could return right when investors feel their most complacent. 

Now the Deep Dive: It’s funny - just six months ago, we saw similar signs. Greed was high, the VIX was low, and prices were surging. Things looked great – that is, until they didn’t. March and April's chaos reminded us how fast confidence can flip to fear.

That’s why when I see this level of complacency in headlines and across the ticker tape, I dust off my copy of Hyman Minsky’s Stabilizing an Unstable Economy.

In short, Hyman Minsky was a brilliant economist who had a simple idea. That stability breeds instability (and vice versa).

This hypothesis - what he called the “Financial Instability Hypothesis” - gained fame after 2008, when people realized he’d outlined the anatomy of a crash decades before.

I’ve shared with you more on this before – but here’s the gist. . .

• When markets are calm, confidence builds.
• Confidence leads to excessive risk-taking.
• Excess risk leads to speculation and systemic fragility.
• And then, a small shock – whether from an external factor like 9/11 or internal factor like a bank failing – can tip the whole thing into a system-wide crisis.

But eventually, the opposite happens as calm returns - and the cycle resets.

These tipping points are now known as Minsky Moments - when tranquility flips into compounding turmoil.

And while these flips are part of how markets and investors behave, there’s reason to think some turbulence may be ahead.

For instance, did you know that over the last three decades, August and September are the worst months of the year in terms of S&P 500 performance?⁶

Meanwhile, volatility tends to pick up as summer turns to fall (see chart below).

There are plenty of reasons for this – like how after a quiet summer, investors return in September, notice gains in their equity positions, and start rebalancing. That means more trading, more volatility, more hedging, and on and on.

But it’s also psychological. Remember, markets are driven by people. Thus if everyone expects August through October to be volatile, their preparation often makes it so - becoming a self-fulfilling prophecy.

And let’s not forget - uncertainty still looms. Ongoing trade wars and geopolitical risks may be getting priced out - but they certainly haven’t gone away.

The point is - when confidence runs highest and risk feels farthest away, that’s usually when fragility is hiding in plain sight.

Said another way - this may be the setup, not the climax.

But don’t forget - the past is not prologue. Meaning what happened 99/100 times before doesn’t mean it will happen the next time.

This is all just something to keep in mind.

Figure 2: ISABELNET.com, July 2025 

Locked-In Sellers, Maxed-Out Buyers: America’s Housing Stalemate

• Existing home sales just hit a nine-month low as buyers face record prices, high mortgage rates, and shrinking affordability - a troubling sign during peak housing season.
  
  
• If home prices drop even modestly, today’s thinly-equitized buyers could see their entire wealth wiped out - a risk that threatens both household stability and the broader economy.

What you need to know: Sales of previously owned U.S. homes (aka existing home sales) dropped in June to a nine-month low as buyers pulled back in the face of record prices and high borrowing costs³. 

Why this matters: According to the National Association of Realtors, existing home sales fell 2.7% - hitting the lowest level since September 2024 - while the median home price hit $435,300, a record for June. This month usually marks the peak of the spring housing season, so a weak showing is a warning flag. Deals are falling through at a record pace (15% collapsed in June), and sellers aren't budging either - locked into low mortgage rates and sitting on big equity cushions. Thus, with neither side eager to move, the market remains stalled and illiquid. 

Now the Deep Dive: The housing market is locked in a high stakes staring contest. And sellers hold the advantage - at least for now.

Buyers are squeezed between high prices and high rates, while sellers - having already won the lottery via refinancing at record low interest rates - see no reason to come to the market.

This standoff has essentially defined housing since 2021 - trapping the market in a doom loop of tight supply, rising prices, and falling affordability.

To put this into perspective, June marked the 24th straight month of annual home price increases. Yet sales in the Northeast fell 8% from May - underscoring the gap between price and demand.

So, how did it get this bad? Three things continue to squeeze the market:

• A chronic shortage of homes after years of underbuilding relative to population growth.
• Mortgage rates remain stubbornly high, eating into household budgets.
• Years of government deficits pumping excess cash into the economy – aka too many dollars chasing too few hard assets like homes.

This has created an affordability crisis - à la pre-2008 - that has weighed on tens of millions.

• I wrote more about this in a previous Morning Pour – “The Housing Market Tug of War: A Looming Correction or a New Normal”

Yet, things may be changing. . .

Inventory rose 16% year-over-year in June, and homes are sitting longer - giving buyers more wiggle room to find better deals.

Meanwhile, nearly a third of the top 100 markets are seeing annual price drops of 1% or more. In other words, buyers are getting some breathing room.

But here’s a deeper concern - something I call the Equity Amplifier.

Say a household bought a $100,000 home with 20% down - that’s $20,000 in equity and $80,000 mortgaged. If home prices fall 20%, that $20,000 isn’t just reduced. It’s gone. Wiped out entirely. That’s because a 20% decline in the home price equals a 100% loss in equity - which could be devastating.

And with today’s first-time buyers typically putting down just 9%, the risk is even more acute.

• Most U.S. households - specifically in the bottom 50% - rely on home equity for wealth-building, retirement, and emergencies⁴. Thus when equity vanishes, it hits not just individual balance sheets and widens inequality – it plagues the entire economy (this is why historically, housing collapses are the worst kinds of crises).

Of course, the amplifier works both ways - rising prices build equity fast (just ask anyone who bought before 2020). But on the way down, it gets brutal. And if home prices fall sharply, the last four years of buyers could be the ones left holding the bag.

Of course, not all markets are equal - Detroit isn’t Palo Alto.

But from a macro lens, it's something to watch.

Figure 3: Bloomberg, July 2025

Anyway, who knows what will happen?

This is just some food for thought as we watch how these trends develop.

As always, we’ll be keeping a close eye on things.

Enjoy the rest of your weekend.

Sources:

1. US GDP Q2 2025: Economy Rebounds Trade Reversal - Bloomberg
2. U.S. goods trade deficit falls to nearly two-year low as imports plunge - The Globe and Mail
3. US Existing-Home Sales Fall to Nine-Month Low on Record Prices - Bloomberg
4. The Fed - Comparison: Compare Wealth Components across Groups
5. September is historically the worst month for U.S. stocks. What investors need to know. - MarketWatch
6. S&P 500 Slumps as Fed Chair Powell Downplays September Rate Cut - Bloomberg

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