Economic Growth Revised Up: Good News for Workers, but Bad News for Mortgage Rates

The economy's growth in the second quarter of the year was much stronger than previously reported, a development that is good news for the labor market, but will put upward pressure on mortgage rates.

Gross domestic product, a measure of total economic output, rose at an annualized rate of 3.8% from April through June, the Commerce Department said on Thursday in its third and final estimate.

That’s far higher than the initial estimate of 3%, and significantly above the 3.3% reported in the second estimate, showing growth surged in the wake of President Donald Trump's tariff announcements.

The strong second-quarter growth primarily reflects a decrease in imports, which are subtracted in calculating GDP, and an increase in consumer spending. Those gains were partly offset by decreases in investment and exports.

Following the revised estimate, long-term bond yields surged higher, a signal that mortgage rates will tick higher in the coming days. That's because the stronger growth figures complicate the picture for future Federal Reserve rate cuts, showing fears of a slowdown may have been overblown.

Since the Fed cut rates last week for the first time since 2024, the outlook for further rate cuts this year has fallen, with financial markets estimating a 64% chance of two more cuts this year, down from 82% a week ago, according to the CME Group's FedWatch tool.

"All else equal, stronger economic data should bode well for the labor market and would normally be expected to exert some upward pressure on interest rates, including mortgage rates," says Realtor.com® Chief Economist Danielle Hale. "Given that this data covers the second quarter, however, I expect its effect to be more muted."

The advance estimate for third-quarter GDP will be released in late October, providing an important snapshot of economic activity during a period when the labor market has softened.

Forecasts suggest that the third quarter is likely to show slower growth than in the second quarter, but the Atlanta Fed's GDPNow real-time estimate currently projects growth of 3.3%, a strong figure.

"This could mean additional upward pressure on interest rates and mortgage rates if economic growth continues to register higher than expected," says Hale.

Mortgage rates on Thursday snapped a four-week streak of declines, rising to 6.3% after averaging 6.26% a week earlier, according to Freddie Mac.

Rates had been falling in anticipation of the Fed's rate cut last week, but Fed Chair Jerome Powell's comments after the decision emphasized that the path of future cuts would depend upon economic developments.

In September 2024, mortgage rates bottomed out near 6% as the Fed began a round of rate cuts, but then began to rise again even as the central bank made further cuts.

It's unclear whether a similar pattern will play out this year, but the lesson of history is that mortgage rates do not move in lock step with the federal funds rate.

Also released on Thursday were weekly unemployment claims, a proxy for layoffs, showing that new jobless claims last week fell to 218,000, less than expected and a fairly unremarkable level.

Two weeks ago, jobless claims surged to a four-year high, raising concerns about layoffs. However, it later emerged that thousands of fraudulent claims filed in Texas had inflated the figure, which has since fallen back to recent norms.