Listen to the full episode, here.
Key Points
- The GDP report for the second quarter of 2025 showed 3% growth, but the underlying data suggests a more moderate pace of economic growth, around 1.5%.
- The Federal Reserve did not cut interest rates at its recent meeting, despite some dissenting voices on the Federal Open Market Committee.
- John and Sam provide anecdotal evidence of a potential slowdown in consumer spending, particularly among higher-income individuals.
- The speakers argue that the Federal Reserve is waiting for more data before making any significant policy changes, as the economic outlook remains uncertain.
Is the Truth Behind the Economic Noise Just More Noise?
John Norris (00:30):
Hello again, everybody. This is John Norris at Trading Perspectives. As always, we have our good friend, Sam Clement. Sam, say hello.
Sam Clement (00:35):
John, how are you doing?
John Norris (00:36):
Fantastically. It sounds like you have a little bit of a cold, so I’m not even going to ask how you’re doing.
Sam Clement (00:42):
I’m okay.
John Norris (00:43):
Here we are, recording on July 31, 2025, and what a week it’s been. The Employment Situation report for July comes out tomorrow, but already this week we’ve had a Federal Open Market Committee (FOMC) meeting — the monetary policy-making arm of the Fed. The meeting ended at 1 p.m. Central time on Wednesday the 30th, and the Fed didn’t cut the overnight lending target, but didn’t raise it either.
We also had the GDP report for the second quarter of 2025. It came in at 3%. The administration loved that number — and who wouldn’t?
Sam Clement (01:33):
Why wouldn’t they?
John Norris (01:34):
The headline was fantastic, but let’s boil it down. The Fed’s statement Wednesday said the economy was moderating. If you read headlines only, you’d think things were booming — never mind that first-quarter GDP was negative 0.5%.
When we see 3%, that’s a good headline number.
Sam Clement (02:18):
Especially given the last few years.
John Norris (02:22):
Right — the norm seems to be 2.2% to 2.6%.
Sam Clement (02:24):
Two or above has been pretty good.
John Norris (02:27):
So, 3% is pretty darn good. But was it really?
Sam Clement (02:36):
Well, we had the exact opposite in the first quarter.
John Norris (02:39):
Go on.
Sam Clement (02:42):
In Q1, the headline was ugly, but the underlying report wasn’t as bad — the economy was still chugging along. This quarter is the flip side: the headline’s great, but the underlying numbers are modest.
John Norris (03:01):
About 1.5%?
Sam Clement (03:03):
Yes. Real final sales, which strips out inventories and net exports, are around 1.2%–1.4%. That feels right for where the economy is.
John Norris (03:17):
Exactly. The economy’s not contracting, but it’s not really at 2.5%–3% either.
Sam Clement (03:43):
Right. Whether it’s GDP or consumer data, the story hasn’t changed much: things are fine.
John Norris (03:43):
For those unfamiliar with GDP, the formula is C + I + G ± net exports:
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C: consumer expenditures
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I: private sector fixed investment
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G: government purchases (not transfer payments like Social Security)
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Net exports: the change in the trade balance
When the trade deficit worsens, it subtracts from GDP; when it improves, it adds.
In Q1, wholesalers and retailers stocked up ahead of the tariffs announced April 2 (“Liberation Day”), widening the trade deficit and dragging GDP down. In Q2, the opposite happened: imports slowed, the trade deficit improved, and that alone added roughly 4.99 percentage points to GDP. This accounting anomaly skews the headline numbers.
When you average Q1 and Q2 final sales, growth is about 1.2%–1.5%.
Sam Clement (06:44):
That’s been our point all year — the economy is growing, but not robustly. The consumer is slowing, but not collapsing. The jobs data is softer, but not disastrous.
John Norris (07:29):
And the unusually strong labor market a couple of years ago may have been the anomaly.
Sam Clement (07:31):
Yes. The concern now is whether the slowdown levels off or tips into recession.
John Norris (08:09):
Since COVID stimulus dried up in 2022–2023, it’s really been the upper income quartile driving growth. The rest are stagnant, spending mostly on necessities. So what happens if the top quartile slows down?
Recently, my wife and I have noticed fewer crowds at restaurants — both in Birmingham and in Manhattan — even at places where reservations used to be impossible. It’s anecdotal, but telling.
Sam Clement (13:27):
Maybe the slowdown is reaching that group, but if people expect it, they tend to adjust — saving more, spending less — which can help prevent a sharp downturn.
John Norris (15:25):
That defensive posturing could ease inflation, which is what the Fed wants.
Sam Clement (16:45):
Yes, though some prices are driven by supply issues tariffs can’t fix — like coffee, beef, cocoa, and oranges.
John Norris (20:37):
Exactly. The Fed can’t make it rain in the Midwest or boost cocoa harvests in West Africa. And tariffs can have unintended consequences, sometimes making imports of finished goods cheaper than raw materials.
Sam Clement (21:23):
Right — like the tax code, tariffs with carve-outs can distort behavior in unpredictable ways.
John Norris (22:09):
That’s why the Fed is sitting tight despite pressure to cut rates. I think they could have cut this week without stoking inflation — demand isn’t that strong.
Sam Clement (23:21):
They have reasons both to cut and not to cut.
John Norris (23:42):
If you blend all the week’s data together, you get an economy that’s not collapsing and not booming; a consumer possibly pulling back; a labor market that’s softer but not broken; and inflation that’s not where the Fed wants it, but not the problem it was. It’s a wait-and-see environment.
Sam Clement:
I agree.
John Norris:
Thanks for listening. You can reach us at or visit oakworth.com under the Thought Leadership tab for more.
Disclosures:
The views expressed are those of the author(s) and do not necessarily reflect the views of Oakworth Asset Management or Oakworth Capital Bank. They are provided for informational purposes only and are not investment advice. Information is believed reliable but not guaranteed. Past performance is not indicative of future results. All investments involve risk. Consult your financial advisor before making investment decisions.