US economy grows sluggishly at 1.5% in second quarter amid high inflation concerns

The U.S. economy expanded at a sluggish 1.5% annual rate from April to June, a slowdown from the first quarter's 2.1% growth, as rising imports offset continued consumer spending. While consumer spending, the main driver of economic activity, rose at a healthy 3.2% pace, up from 0.5% in the prior period, the increase in imports shaved 1.5 percentage points off GDP growth.

Despite the overall deceleration, underlying economic strength appeared robust. A measure excluding volatile government spending and trade figures grew at a 3.9% annual pace, and business investment, excluding housing, rose at an 8.4% pace, indicating strong activity in areas like artificial intelligence. "The consumer rescued the quarter," said Olu Sonola, head of U.S. economics at Fitch Ratings. "AI investment remains a powerful growth story, but the import surge underpinning the buildout is a reminder that an AI boom does not automatically translate into an equally large boost to U.S. GDP."

Meanwhile, the Federal Reserve's favored inflation gauge, the personal consumption expenditures (PCE) price index, rose 3.7% in June from a year earlier, a slight decrease from May's 4.1% but still well above the Fed's 2% target. Core consumer prices, excluding food and energy, were up 3.3% year-over-year. This persistent inflation, coupled with Americans' frustration over the high cost of living, adds pressure as the midterm elections approach. The Fed recently held its benchmark interest rate steady for the fifth consecutive meeting, but some officials express impatience with the lack of progress on inflation.

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The consumer rescued the quarter. AI investment remains a powerful growth story, but the import surge underpinning the buildout is a reminder that an AI boom does not automatically translate into an equally large boost to U.S. GDP.