The US economy grew at a 3.8% rate in the second quarter, significantly stronger than previously reported

[Wiz Imp]

50. Instead of trafficking in conspiracy theories about how everything is "fake" (it's not)

I wish people would pay attention to why the data is real but extremely misleading. It is a quirk in how the GDP is calculated.

The "import effect" is a statistical distortion in the GDP calculation that causes a boost in the second quarter (Q2) following a surge in imports in the first quarter (Q1), even without a genuine change in domestic demand. It is an accounting anomaly resulting from businesses stockpiling foreign goods ahead of anticipated tariffs. 

How the import effect creates a statistical boost 

GDP formula: The standard formula for GDP is (Y=C+I+G+(X-M)), where M represents imports. Imports (M) are subtracted in the calculation to ensure that only domestically produced goods are counted.

Q1: Imports surge: Businesses "front-load" imports in anticipation of future tariffs to avoid higher costs. The value of these goods enters the Investment (I) component of the formula as inventory. But because the goods are foreign, an equal value is subtracted in the Imports (M) component. The two numbers cancel each other out, so GDP is not directly affected.

Q2: Imports fall: After stockpiling, businesses dramatically reduce their imports in the second quarter. The Imports (M) variable becomes a much smaller subtraction in the GDP calculation. This smaller negative figure causes a mathematical boost to the headline GDP number for Q2.

The illusion: This boost is an accounting artifact, not a reflection of real economic growth. The high headline GDP number in Q2 hides the fact that businesses had to scale back orders for domestically produced goods to avoid overstocking their bulging inventories. 

The effect on underlying domestic demand

A key indicator that separates the import effect from genuine economic strength is "final sales to private domestic purchasers," which measures purchases by U.S. households and businesses. A strong reading for this metric suggests robust domestic demand. In contrast, the import effect shows a scenario where domestic purchases are soft, but the headline GDP number is high due to the mathematical impact of falling imports.

For example, in Q1 2025, U.S. firms surged their imports while simultaneously reducing their purchases of domestically produced goods. In Q2, the subsequent plunge in imports led to a robust headline GDP figure, even though domestic demand was weak. In this way, the import effect can paint a misleading picture of economic health.