Economic growth fell short of forecasts as a wider trade deficit weighed on output, though stronger household spending and continued investment in artificial intelligence infrastructure supported domestic demand.
By yourNEWS Media Newsroom
The U.S. economy grew at a 1.5% annualized rate during the second quarter, slowing from the beginning of the year as a widening trade deficit offset stronger consumer spending and substantial business investment in artificial intelligence equipment.
The Commerce Department’s Bureau of Economic Analysis released its advance estimate Thursday. The result was weaker than the 2.1% growth rate recorded during the first quarter and below the 2.1% median forecast among economists surveyed by Reuters.
Individual estimates had ranged from 0.8% to 2.9%, although the survey was conducted before the release of June’s advance economic indicators. That report showed a moderate narrowing in the goods trade deficit and no change in retail inventories, prompting some economists to reduce their second-quarter forecasts by as much as 0.8 percentage points to approximately 1.5%.
Although the headline growth figure reflected a slowdown, several components of the report pointed to continued strength within the domestic economy. Consumer spending, which represents more than two-thirds of U.S. economic activity, increased at a 3.2% annualized rate after rising only 0.5% during the January-through-March quarter.
Spending remained resilient despite higher energy costs associated with the continuing conflict in the Middle East. Larger tax refunds helped consumers absorb increased gasoline prices, while higher-income households benefited from rising asset values and continued to account for a significant share of purchases.
Tax refunds connected to President Donald Trump’s “One Big Beautiful Bill” provided additional support for household finances. Spending associated with the recently concluded FIFA World Cup and midterm election activity by nonprofit organizations also likely contributed to demand during the quarter.
Business investment in equipment remained strong as companies continued building data centers and other infrastructure needed for artificial intelligence systems. The AI investment boom has shown little sign of slowing, even as investors question whether valuations for many technology companies have risen too far and whether the enormous spending commitments will produce sufficient returns.
That investment helped offset weakness elsewhere in the economy and provided an important source of domestic demand. Economists nevertheless warned that the six-month U.S.-led war with Iran could weigh on consumption, business activity and overall growth during the second half of the year.
The Federal Reserve left its benchmark overnight interest rate unchanged Wednesday in a range of 3.50% to 3.75%. Three members of the Federal Open Market Committee dissented, saying they preferred a quarter-percentage-point increase.
The central bank said economic activity was “expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East.”
Economists increasingly expect the Fed to raise rates as early as September in response to persistent inflation. Additional monetary tightening would increase borrowing costs and could further slow economic activity during the second half of the year.
Renewed hostilities in the Middle East have pushed the national average gasoline price back above $4 per gallon. The increase has placed additional pressure on households at a time when wage growth is barely keeping pace with inflation.
Consumers have maintained spending partly by drawing down savings and setting aside a smaller share of their income. Economists warned that such behavior cannot continue indefinitely, particularly if energy prices remain elevated or economic uncertainty worsens.
Some analysts expect households to become more cautious and begin rebuilding savings as protection against future disruptions. A shift toward precautionary saving would likely reduce consumer spending, removing one of the strongest supports for current economic growth.
The second-quarter report therefore presented a mixed picture. Trade reduced the headline growth rate, but consumers continued spending and businesses maintained aggressive investment in AI-related equipment. Whether that strength persists will depend heavily on inflation, interest rates, the course of the Middle East conflict and the ability of households to sustain spending without further depleting their savings.
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