US: Real GDP Moderated in Q2, But Domestic Demand Was Strong

Jul 30 26, 13:40 GMT

The U.S. economy expanded by 1.5% quarter-on-quarter (q/q, annualized) in the second quarter, decelerating from 2.1% in the first quarter, and weaker than the consensus forecast of 2.0%.
Underneath the softer headline, consumer spending rose by a healthy 3.2% q/q, well above Q1’s 0.5%. Goods and services spending accelerated to 5.2% and 2.2% respectively.
Business investment was also strong. Outlays grew by 8.4% q/q, supported by continued strength in equipment spending (+15.2%) and another solid gain in intellectual property products (+8.8%). Meanwhile, spending on structures (-5.0% q/q) declined for a tenth consecutive quarter. Residential investment (1.5%) rebounded modestly as home sales picked up with the spring buying season.
Government spending (-0.8%) declined as the post-shutdown rebound in the first quarter faded.
International trade shaved a full percentage point from growth in Q2, as a surge in imports (+11.5%) was only partly offset by a solid gain in exports (+4.5%). The gain in imports was driven by a pick-up in goods, though services were also marginally higher. Inventory investment also shaved 0.7 percentage points off of Q2 GDP.
Final sales to private domestic purchasers, a better gauge of underlying demand as it includes only household consumption and fixed investment, rose by a very healthy 3.9%, an acceleration from Q1’s gain of 1.7%.
Core PCE inflation rose 3.4% q/q annualized, down a percentage point relative to Q1’s 4.4%.

Despite a seemingly disappointing headline, the advance estimate for real GDP showed that the economy remains healthy overall. Consumption growth was primed for a rebound after weather-related disruptions acted as a drag in Q1, but still came in well above expectations. Growth in consumer spending on discretionary items like eating out and recreation are also positive indicators. Moreover, while business investment remained concentrated in AI-related categories, it also expanded to other categories like industrial and transportation equipment. The primary constraint on growth in Q2 was strong import growth, which shaved 1.5 percentage points off total growth for a second consecutive quarter.
This was a holistically solid reading for the economy, which when combined with moderate stabilization in the labor market provides a steady hand-off to the second half of the year. While rising interest rates, volatile energy prices, and new tariff policies could act as near-term headwinds, we expect the economy to be able to sustain growth of roughly 2% through the second half of the year on the back of continued investments in AI and moderate growth in consumer spending.