U.S. economic growth decelerated in the second quarter, with gross domestic product expanding at a 1.5% annualized rate, the Commerce Department's Bureau of Economic Analysis said in its advance estimate of Q2 GDP. The print fell short of the 2.1% gain economists surveyed by Reuters had expected, with individual forecasts ranging from 0.8% to 2.9%.
That Reuters survey was completed before the release of June's advance economic indicators, which recorded a moderate contraction in the goods trade deficit and showed retail inventories essentially unchanged. Those June data prompted some forecasters to lower their GDP projections by up to 0.8 percentage point, bringing some estimates down to the 1.5% outcome reported in the advance GDP estimate. By comparison, the economy expanded at a 2.1% pace in the first quarter.
Underlying domestic demand, however, showed notable resilience. Consumer spending - which accounts for more than two-thirds of U.S. economic activity - accelerated to a 3.2% annualized rate in Q2 after a marked slowdown to a 0.5% pace in the January-March quarter. Several factors supported household outlays, including larger tax refunds this year, which helped blunt the impact of higher gasoline prices linked to renewed hostilities in the Middle East.
Policy changes and income effects also played a role. The tax refunds reflected provisions in President Donald Trump’s "One Big Beautiful Bill," and wealthier households benefiting from gains in asset prices contributed to spending growth. Event-driven and institutional spending also provided pockets of support - the recently concluded FIFA World Cup likely supported some consumer activity, and midterm election-related spending by nonprofits added incremental demand.
On the investment front, business spending on equipment tied to the expansion of artificial intelligence infrastructure remained robust. The article's data point to the ongoing AI investment boom as a meaningful source of domestic demand, sustaining business capital expenditures even as some investors voice concerns about stretched valuations in the technology sector.
Despite these domestic strengths, economists flagged several headwinds that could dampen activity in the second half of the year. The U.S.-led conflict with Iran - now in its sixth month - was cited as a potential downside risk to demand and overall growth, partly through its effects on energy markets and elevated uncertainty.
The Federal Reserve signaled continued vigilance on inflation at its recent policy meeting, leaving the federal funds target range unchanged at 3.50%-3.75%. Three members of the Federal Open Market Committee dissented, preferring a quarter-percentage-point hike. In describing the economy, the Fed said activity was "expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East." Economists continue to anticipate further tightening, with many expecting a rate increase as soon as September to combat inflation - an expectation that has been factored into forecasts for slower growth later in the year.
Energy costs have trended higher amid geopolitical tensions. Average gasoline prices have climbed back above $4 a gallon amid renewed hostilities in the Middle East, increasing the cost burden on consumers. With wage growth only marginally outpacing inflation, households have been dipping into savings and lowering their saving rates to maintain consumption. Economists warned that such a pattern is not sustainable indefinitely, and some expect consumers to shift toward rebuilding precautionary buffers in the face of economic uncertainty.
Analysis
The advance GDP estimate paints a picture of an economy with durable domestic demand but also with clear vulnerabilities. Consumer resilience and targeted business investment related to AI infrastructure helped offset a larger trade deficit, yet elevated energy prices and potential monetary tightening introduce downside risks. How households reallocate spending versus saving in the coming months will be an important determinant of growth momentum.