America’s economy just handed in a report card that reads like two different economies stapled together. Real GDP grew 1.5% in the second quarter — unchanged from the advance estimate and a clear step down from the first quarter’s 2.1% pace. But corporate America’s profits didn’t get the memo: they surged $400.9 billion, more than five times the $74.4 billion gain recorded in the first three months of the year.
The Numbers
- Real GDP (Q2, second estimate): +1.5% annualized — unchanged from the advance estimate (source: BEA)
- Corporate profits (current production): +$400.9 billion in Q2, versus +$74.4 billion in Q1 (source: BEA)
- Real gross domestic income (GDI): +2.2%, versus +1.2% in Q1 (source: BEA)
- Real final sales to private domestic purchasers: +4.2%, revised up 0.3 points (source: BEA)
- PCE price index: +5.3% annualized, revised up 0.2 points (source: BEA)
- Core PCE (excluding food and energy): +3.6% annualized, revised up 0.2 points (source: BEA)
Two Economies, One Report Card
The headline growth number didn’t move — 1.5% today, 1.5% a month ago. But underneath it, three things shifted in ways that matter. The inflation print got worse on revision, not better. The PCE price index, the Federal Reserve’s preferred inflation gauge, was revised up to 5.3% on an annualized basis, and the core measure to 3.6%. That is the wrong direction for a central bank that has spent years trying to pin inflation back to its 2% target.
The growth that did happen came from the private sector. Real final sales to private domestic purchasers — consumer spending plus business investment, stripping out the noise of government and inventories — ran at a healthy 4.2%. And then there is the number hiding at the bottom of the release: corporate profits jumped $400.9 billion in a single quarter. That is the kind of figure that explains why the S&P 500 has been notching record highs on a blockbuster earnings season, even as households report confidence sitting at a seven-month low.
There’s a reason those two things can be true at once. When prices run hot, revenue runs hot. Companies that can pass higher costs along to customers — faster than wages catch up — protect their margins while the consumer absorbs the squeeze. That is the quiet engine behind a profit boom alongside a cooling economy.
The Jackson Hole Wildcard
All of this lands on Fed Chair Kevin Warsh’s desk at a lousy moment. He’s set to make his Jackson Hole debut later this week, and the bond market is already on edge. As Reuters framed it this week, markets have already sped toward the conclusion that the Fed’s policy rate needs to be higher, with inflation stuck above the 2% target for more than five years and Warsh’s colleagues worried about the central bank’s credibility.
A 5.3% annualized inflation print is exactly the kind of number that makes a “higher for longer” message land harder. Warsh has signaled he’d rather not forecast the Fed’s next move, but a hot revision to the central bank’s own preferred gauge may not leave him much room to stay vague.
Bottom Line
The second estimate didn’t change the story’s headline number, but it sharpened the plot: growth is cooling, prices are stickier than first thought, and corporate profits are on a tear. The next test comes September 30, when the third estimate arrives alongside the big annual benchmark update to GDP and income data. Until then, the question hanging over everything is whether the profit boom can keep papering over a consumer that’s running out of gas.