US GDP slows, but consumers are still consuming

The US economy is growing at a slower pace, but it’s not letting anything knock it down. GDP growth sank to 1.5% last quarter, the government estimated yesterday, down from 2.1% in the previous quarter and below the 1.8% that economists expected.

But, after stripping out volatile government spending and trade numbers, the US economy still grew a relatively healthy 3.9% despite jitters from the Iran war—largely because Americans kept shopping:

• Growth in consumer spending, aka the mighty fuel of the US economy, accelerated to 3.2%, from 0.5% in Q1.
• Analysts say that household budgets were aided by bigger-than-usual tax refunds this spring and gas price declines in June stemming from a ceasefire in the Iran war, which has since unraveled.

A separate government report showed that cheaper gas contributed to overall consumer prices falling in June by 0.1% for the first time in six years, though the annual inflation number of 3.7% was still above the Fed’s goal of 2%. Analysts warn that Americans’ purchasing power might run out of steam this quarter as resumed fighting in Iran reignites inflation.

The AI splurge economy

Much of the economic expansion was driven by growth in business investment, courtesy of companies spending big on AI infrastructure. More than half of the overall GDP growth in Q2 was driven by AI-related investments like data center construction, according to an estimate by Stripe’s Chief Economist Ernie Tedeschi.

However, some corporate AI spending might have actually dampened the official GDP number, since many chips and other supplies came from abroad, accelerating import growth.

Looking ahead: The government will likely revise its Q2 growth estimate in the coming weeks, and the Federal Reserve will be watching closely as it weighs whether to raise interest rates in September to fight stubbornly high inflation.—SK