US Economic Growth Slows in Second Quarter, but Domestic Demand Robust

U.S. economic growth decelerated in the second quarter, with gross domestic product increasing at a 1.5% annualized rate, falling short of the 2.1% pace anticipated by economists. The Commerce Department's report highlighted that a widening trade deficit contributed to the slowdown, although strong domestic demand, fueled by consumer spending and business investment, provided a buffer.

Despite the moderation, the economy demonstrated resilience, largely weathering geopolitical tensions in the Middle East. Robust consumer spending, which accounts for over two-thirds of U.S. economic activity, surged at a 3.2% rate, boosted by substantial tax refunds. Business investment also showed strength, particularly in areas related to artificial intelligence infrastructure, with spending on equipment rising by 15.2% for a second consecutive quarter of double-digit growth.

However, underlying vulnerabilities persist. The economy's reliance on imports, especially for the AI buildout, led to a significant widening of the trade deficit, which subtracted 1.01 percentage points from GDP growth. Furthermore, with the personal saving rate at a four-year low, economists expressed concern that consumers may struggle to sustain spending levels, particularly as gasoline prices trend upward and the cushion from tax refunds diminishes.

Economists noted that while underlying growth remains solid, its sustainability is questionable. The report also indicated a continued drawdown of inventories to meet strong domestic demand. Factors such as a recent stock market sell-off and the upward trend in gasoline prices could further challenge economic momentum in the latter half of the year.

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Underlying growth is solid, ‌but unlikely to ‌be sustained.