WASHINGTON — At first glance, the U.S. economy looks like it’s roaring back. Gross Domestic Product surged to a 3% annualized rate in the second quarter of 2025 — a sharp rebound from the -0.5% decline in the first quarter, and well above economists’ 2% forecast. But beneath that strong headline number lies a much murkier picture.

The apparent strength is largely artificial, the result of businesses pulling back on imports after an early-year buying frenzy driven by fears over President Donald Trump’s sweeping tariffs. The result? Inventory shifts gave GDP a statistical boost — one that doesn’t reflect real economic momentum.

“It’s like putting lipstick on a very tired pig,” quipped one Wall Street analyst.

Indeed, the story of the second quarter is less about consumer and business health, and more about timing. In the first three months of the year, imports skyrocketed 38% as companies rushed to get ahead of new tariffs. Then, in the second quarter, those same businesses slowed imports by 30.2%, instead drawing down their stockpiles.

Since imports are subtracted from GDP and exports are added, that reversal alone gave the GDP number an artificial boost — a technical quirk that paints an inflated picture of actual economic activity.

“Don’t underestimate the U.S. economy,” but…

Economists remain divided. Some see resilience; others, red flags.

Sarah Wolfe, a senior economist at Morgan Stanley Wealth Management, remains cautiously optimistic: “My motto these past six years at Morgan Stanley is don’t underestimate the resilience of the US economy,” she told CNN. “That doesn’t mean we’re not in a slowdown.”

Consumer spending — which accounts for about 70% of the U.S. economy — did pick up from the first quarter’s sluggish 0.5% growth to a still-weak 1.4% pace in Q2. But combined, these are the two slowest quarters of consumer activity since the pandemic.

Meanwhile, business spending plunged to 1.9% from a roaring 10.3% in Q1 — a dramatic slowdown as companies recalibrated after stockpiling goods earlier in the year.

More troubling is the figure many economists view as a more accurate measure of real economic demand: real final sales to private domestic purchasers — or what’s sometimes called “core GDP.” That figure slowed to just 1.2% in Q2, down from 1.9% in Q1, and marked the weakest reading since late 2022.

“Headline numbers are hiding the economy’s true performance,” said Kathy Bostjancic, chief economist at Nationwide. “If core GDP continues at this pace, there will be even more pressure on the Fed to cut rates.”

What the Fed sees — and why it might not act just yet

This week’s GDP report lands at a critical moment for the Federal Reserve. Policymakers are currently meeting in Washington, with a decision on interest rates expected by Wednesday evening.

The central bank is widely expected to hold rates steady — for a fifth consecutive time — despite growing market speculation that rate cuts could begin as early as September.

That decision could come with dissent from at least two Fed governors: Michelle Bowman and Christopher Waller. If they both vote against holding rates, it would be the first time in over three decades that two sitting Fed governors dissented in the same meeting — a sign of deepening division inside the Fed over how to respond to a mixed economic picture.

Unemployment remains low, and inflation has cooled modestly. But if “core GDP” remains soft — and if job data later this week shows any weakening — calls for rate cuts will grow louder.

“The Fed’s in a bind,” said William English, a former senior Fed adviser. “They know they’ll need to cut rates soon. But the data is noisy, the economy isn’t collapsing, and they don’t want to get ahead of a phantom slowdown.”

Investors are betting the Fed will cut twice this year — once in September and again in December — especially if the real economy continues to lose steam while inflation stays muted.

A paper tiger economy?

For now, the U.S. economy continues to hum — on the surface. But with weak consumer demand, shaky business investment, and artificial GDP gains from tariff-induced inventory games, the reality may be far less sturdy.

And if Washington can’t chart a clearer path forward — or if global shocks intensify — the second half of 2025 could look very different from the headlines.

Because even if the number says “growth,” the signs underneath are flashing yellow.