The US economy grew at a far weaker than expected pace in the second quarter despite a pickup in consumer spending and solid business investment. According to the BEA, GDP (inflation adjusted) rose just 1.5% in the period, according to the first estimate issued Thursday\u00a0by the Bureau of Economic Analysis. This was well below the 2.0% median estimate.\u00a0<\/p>\n
The contributors to the increase in real GDP in the second quarter were increases in consumer spending, investment, and exports that were partly offset by a decrease in government spending.\u00a0A decline in volatile net exports masked strength in underlying demand as imports, which are a subtraction in the calculation of GDP, increased.\u00a0Consumer spending, which comprises about two-thirds of economic activity, rose at a 3.2% rate.\u00a0Business investment\u00a0continued to boom amid\u00a0a debt-fueled rush\u00a0to invest in artificial intelligence.<\/p>\n
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A closer look at the underlying data:<\/p>\n
Business investment\u00a0remained\u00a0a key driver of growth in the second quarter. The massive AI investment push continued to play a critical role as did demand for industrial and transportation equipment.\u00a0After the Fed decided to keep interest rates\u00a0unchanged\u00a0on Wednesday, Chairman\u00a0Kevin Warsh\u00a0described the economy\u2019s resilience as \u201cimpressive\u201d but noted its \u201cmost striking\u201d feature is the strength of business investment.\u00a0<\/p>\n
The GDP report showed\u00a0nonresidential\u00a0fixed investment\u00a0rose at an 8.4% pace.\u00a0Investment in\u00a0industrial equipment\u00a0surged by the most since 2011, and outlays for transportation equipment jumped by the most in two years. Information processing equipment and software outlays rose at a strong, albeit slower rate.\u00a0<\/p>\n
Net exports\u00a0subtracted a percentage point from the calculation of GDP in the second quarter. That likely reflected a mix of factors, including efforts to get goods into the country before a\u00a0new wave\u00a0of tariffs and the rapid pace of capital investment.\u00a0Inventories stripped an additional 0.67% from GDP,\u00a0suggesting many businesses drew down their inventories during the war.Federal government outlays\u00a0declined, reflecting sales of crude oil from the Strategic Petroleum Reserve, according to the report. But because sales of the oil are reflected in other components of GDP, there is \u201cno direct effect\u201d on GDP. Even so, spending on national defense increased amid the war with Iran.\u00a0<\/p>\n
Meanwhile, the strength in household outlays was fueled by spending on durable goods like furnishings and motor vehicles. Within services, consumers ramped up outlays on discretionary categories like recreation and food services and accommodation.\u00a0<\/p>\n
Because swings in trade can distort GDP, economists pay close attention to a narrower metric of underlying demand known as\u00a0final sales to private domestic purchasers\u00a0that excludes net exports, changes in inventories and government spending. This measure climbed 3.9% in the second quarter, more than double the first quarter pace and the strongest since early 2023.<\/p>\n
As Bloomberg notes,\u00a0the latest data highlight an economy that\u2019s so far powering through the fallout of the Iran war, while getting the benefit of a historic credit-fueled spending spree behind AI spending. While the conflict has pushed prices higher and weighed on sentiment, a slide in gasoline costs at the end of the quarter alongside higher-than-usual tax refunds and sales promotions helped support household spending.<\/p>\n