US economy’s growth was weaker than expected in the second quarter

By Bryan Mena, CNN

Washington (CNN) — The world’s largest economy lost steam heading into summer as red-hot demand for AI infrastructure widened the trade deficit, dampening growth.

Meanwhile, Americans ramped up their spending in the quarter, a welcome sign for an economy that relies so strongly on consumption for growth.

US gross domestic product, which captures all the goods and services produced in the economy, expanded at an annualized rate of 1.5% from April through June. That was well below the 2.1% rate in the prior quarter and lower than the 2.1% economists predicted in a poll by data firm FactSet. GDP is adjusted for seasonal swings and inflation.

The trade deficit grew 42.2% to a seasonally adjusted $77.6 billion in May, according to Commerce Department data. It was the highest level in nearly a year, as imports of computer accessories, semiconductors and other AI-related products far outstripped exports. The trade gap shrank slightly in June.

But consumer spending, the lifeblood of the US economy, picked up sharply in the second quarter to an annualized 3.2% rate, up from the first quarter’s 0.5%. It was the fastest pace in nearly a year, and was the largest contributor to GDP for the three-month period.

Business investment was also robust, expanding at an annualized rate of 8.4%, down from the prior quarter’s 10.6%.

Americans benefited from a robust labor market, a buoyant stock market, bigger tax refunds and savings, said Kathy Bostjancic, chief economist at Nationwide, said in commentary issued Thursday.

“The renewed rise in energy prices presents a headwind for household budgets, but if the labor market stays strong and income gains solid, we anticipate consumers can continue to ride out the energy shock and maintain solid spending,” she added.

A closely watched measure of underlying strength in the economy that strips out volatile components — known as core GDP — accelerated sharply in the second quarter, up to 3.9% from the prior quarter’s 1.7%.

Businesses investing heavily in AI and consumers flush with bigger tax refunds boosted growth at the start of the year. That momentum persisted into the summer as the World Cup drew tourists from around the world and businesses continued to invest in AI. In-person spending rose 5% on a yearly basis across the cities that hosted a game, with restaurants and bars showing some of the largest gains, according to Bank of America. Host cities included 11 of the largest American cities, such as New York, Los Angeles, and Houston.

The war with Iran has made it difficult for consumers, businesses and policymakers to plan ahead and has boosted inflation. But with inflation slowing in June, wages are no longer being eroded by inflation — for now.

Consumer sentiment dropped as the Iran war escalated in the spring, reaching a record low in May. Americans’ economic attitudes have improved since then, mostly thanks to lower gas prices, but sentiment remains near historically low levels.

Overall, the steady labor market has proven to be a reliable pillar of strength for the US economy. New applications for unemployment benefits, for example, continued to hover at historically low levels last week, according to a separate report from the Labor Department.

A solid labor market allows the US Federal Reserve to focus on inflation, which remains above the bank’s 2% target. Though the Fed help interest rates steady on Wednesday, three officials on the rate-setting committee voted for a hike to combat price pressures.

“We see the labor picture as really holding up pretty well, which sort of gives the Fed this luxury of hyper-focusing on inflation,” Michael Reynolds, vice president of investment strategy at Glenmede, told CNN.

And businesses are still pouring money into AI, including building data centers and other tech infrastructure.

“We don’t know the extent to which the economy will benefit from the AI build-out,” Fed Chairman Kevin Warsh told senators in a congressional hearing earlier this month. “Yet it seems inevitable that what is now called ‘AI investment’ will soon be called just ‘investment.’”

Correction: This story has been updated to clarify that consumer spending and business investment in AI grew in the second quarter.

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