Key facts
- US GDP grew at a 1.5% annual rate in Q2, missing economists' forecasts.
- Consumer spending increased by 3.2% in Q2, indicating underlying demand strength.
- Business investment, particularly in AI and equipment, rose significantly.
- A widening trade deficit and inventory drawdown acted as headwinds to GDP growth.
- Inflation, measured by PCE, remains above the Federal Reserve's 2% target.
- The Federal Reserve maintained its benchmark interest rate, but some policymakers favored a hike.
The U.S. economy grew at a 1.5% annual rate in the second quarter, a slowdown from the 2.1% pace in the first quarter and below economists' expectations. The deceleration was partly attributed to a significant increase in imports, which subtracted 1.5 percentage points from GDP, and a drawdown in inventories. However, underlying demand remained robust, with consumer spending rising 3.2% and business investment surging 8.4%, driven by investments in artificial intelligence and equipment.
Final sales to private domestic purchasers, a measure excluding trade, inventories, and government spending, climbed 3.9%, indicating strong domestic demand. Consumer spending was boosted by purchases of durable goods and discretionary services. Despite the overall GDP slowdown, business investment continued to be a key driver, with outlays for industrial and transportation equipment showing substantial increases.
Inflation, as measured by the PCE price index, showed mixed signals. The index fell 0.1% month-over-month in June, but the annual increase remained above the Federal Reserve's 2% target at 3.7% in July. Core PCE inflation was 3.3% annually. The Federal Reserve kept interest rates unchanged for the fifth consecutive meeting, though three policymakers voted for a rate hike due to persistent inflation.
The outlook remains uncertain, with potential impacts from the recent flare-up in the Middle East and new tariffs imposed by President Donald Trump. However, economists generally expect consumer spending to stabilize in the second half of the year, supported by limited layoffs and resilient shopper behavior, despite some companies noting increased consumer discernment.