GDP Report: Americans Are Burning Through Their Savings

America's economic activity, GDP for the second quarter of 2026, came in much weaker than expected, and the report shows that American consumers are suffering. It's probably not news to anyone here, but let me give you the details of the report. Economists were predicting that GDP growth would come in at a rate of 1.8%, and that was actually a lowball figure. But the results came in below expectations of 1.5%, and that's not good. In today's video, let's cover these items. Why did GDP slow down? Should we be concerned? And can American consumers continue carrying the economy? But before we answer those questions, I want to clear this up because a lot of people get confused by this. A lot of people ask, does the GDP report already account for inflation? And the answer is, kind of, sort of. So let me explain. So the GDP number that's reported on the news is called real GDP, and that means that inflation has already been taken into account. And I want to give you a simplified example. So let's say that the economy is growing by 5%, okay? But inflation is running at, let's just say, 2%. Then roughly speaking, real GDP growth would be about 3%. In other words, economists are trying to measure how much the economy actually grew after removing the effects of inflation. So when you hear that GDP grew by 1.5%, that's already an inflation-adjusted number. But the reason why I said, kind of, sort of, is because, well, it's just my opinion, it's my belief, and I explained this thoroughly in previous videos, why I believe that the government is under-reporting the true rate of inflation. Now let's answer this question. Why did GDP slow down in Q2 of 2026, so we're talking about April, May, June, to 1.5%? So if you just read the headline, you may believe that consumer spending weakened, right? I mean, after all, consumers make up roughly two-thirds of the U.S. economy, and if consumer spending slows down, then GDP usually slows down as well, right? But that's actually not what happened. According to the Commerce Department, there were three primary reasons why GDP came in below expectations. Government spending declined slightly, businesses reduced their inventories, and international trade became a drag on economic growth. So we're going to start with international trade because I think that this is one of the most misunderstood parts of the GDP report. And I want to begin by answering this question. Why do imports reduce GDP? So I think that's a great question. GDP measures goods and services that are produced inside the United States of America. Now I want to give you an example. Suppose that you bought a laptop. If that laptop was manufactured in another country, then your purchase is absolutely going to count as consumer spending, okay? But because a laptop wasn't produced here in the United States of America, it's not going to count as U.S. production. Therefore, imports are subtracted from GDP. So that's simply how the calculation works. Now here's where the GDP report becomes more interesting. Normally, if there's higher imports, then that might suggest that Americans are buying more foreign-made consumer products, but economists are saying that that wasn't the case for this quarter. Instead, it was the businesses. So what was going on is that many businesses dramatically increased their purchases of AI chips, semiconductors, servers, networking equipments, and just basically any other technology supplies needed to build out their AI infrastructure. So this is probably not a shocker to most people. So why don't you think about all the companies that have been investing billions of dollars into AI. I'm sure you're aware, Microsoft, Amazon, Google, Meta, Oracle, etc. So they're building massive data centers, they're building servers, they're buying AI chips, and many of those components are manufactured overseas. So mathematically, those imports reduce GDP. But the thing is that economically, they represent businesses that are investing for future growth. So I think that there's a very important distinction there. So I just want to point out that businesses aren't necessarily pulling back. In many cases, they're actually expanding. But the thing is that, of course, it could all fall apart, and it could slow down, it could stop, but that's the situation as of now. And another factor that reduced GDP was lower government spending. Federal government spending declined modestly for this quarter, and trust me, it's not due to fiscal discipline. As you probably know, many departments are running out of money, so they have to basically just stretch their dollars. So since government purchases are one component of GDP, that also reduced overall economic growth. And then businesses, they also reduced their inventories. When businesses build up inventories, that's going to generally add to GDP. But when they reduce inventories, then it's going to reduce GDP growth. So this quarter, inventories were one of the reasons why GDP came in much weaker than expected. So yes, the thing is that those three areas helped pull GDP growth down to 1.5%. Imports was the biggest drag, followed by inventories and then federal spending. But then I noticed something that honestly surprised me. Consumer spending actually accelerated. So you can compare it to the previous quarter, it's represented by that lightly shaded gray bar below the blue bar. I know it's kind of hard to read, so sorry about that. But that's where this report starts to become much more interesting. So if you didn't know, consumer spending is actually the largest driver of the US economy, accounting for roughly two-thirds of GDP. If consumers continue spending money, then businesses will continue making sales, and companies will continue hiring, and the economy is generally going to continue expanding. But if consumers pull back, then the opposite is going to happen, which is, of course, a bad thing. So the bottom line is that Americans continue to spend. And initially, you would think that's a good thing, because American consumers are propping up the US economy. But I took a look just one level deeper, and you're going to want to see this. The Commerce Department also released information on personal income and personal spending. So personal income increased by just 0.2% during June. Personal spending, however, increased 0.3%. Now, I just want to say that that difference may not sound like much, but I want you to think about what that means. So to me, it's very straightforward. If you're spending more money faster than your income is growing, then where's that money coming from? For most people, for most households, it's coming from their savings. The personal savings rate declined to just 2.7%, and I want you to take a look at the chart. This spans almost 70 years. So to me, this may be one of the most important numbers in entire reports, because it makes you question how strong US consumers are right now. Now, I do want to say this. So you can make up your own mind about the situation. A low savings rate, like that's not going to automatically mean that the economy is headed for a recession. But I want you to know, using common sense, money saved, you know it's not unlimited. I mean, eventually households either need stronger income growth, or they're going to have to start reducing their spending. And if consumer spending begins to slow down, then that's going to have a much bigger impact on GDP than many of the other components that we discussed today. So that's why I think that the savings rate deserves more attention than it's getting. Another point worth mentioning is the artificial intelligence boom. So AI continues to be one of the biggest investment themes in the US economy. Again, probably to no one's surprise, companies are spending enormous amounts of money to build the infrastructure they need to support artificial intelligence. More than half of real GDP growth in the second quarter was due to computers or data centers or basically something related to information processing equipments and software. And that investment, it's clearly showing up in the economic data. But interestingly, it's showing up in two different ways. On one hand, it's helping support economic growth through higher business investments, as you see right there. And on the other hand, because a lot of the equipment that's used for AI is imported, it's also weighing on the GDP calculation. So I just want to say that that's why it's important to look beyond the headline number, because sometimes, yeah, the headline will tell you what happens, but you have to dig into the report to understand why it happens. Now, does this GDP report change what I think about the US economy? And my response would be like, honestly, not dramatically, because if anything, I think it reinforces what we've been discussing on this channel for several months now. You know, economic growth is occurring in a very uneven way. And consumer spending, yes, it's remained resilient. But at the cost of that situation, the majority of Americans are dipping into their savings. Okay, so that's your GDP report. Please subscribe. Thank you for the support. And I wish you a very nice day. Take care.