The US economy grew at a slower pace than anticipated in the second quarter, yet robust consumer spending and business investment indicate underlying domestic demand remains resilient.
Preliminary data from the Bureau of Economic Analysis, released on Thursday, showed real GDP expanded at an annualized rate of 1.5% in the April-June period, falling short of market expectations. A decline in net exports dragged down the overall figure, but consumer outlays and commercial investment both held up strongly, partially offsetting external pressures.
Meanwhile, the core Personal Consumption Expenditures (PCE) price index, a key inflation gauge, rose at a 3.4% annualized quarterly rate in the second quarter. Federal Reserve Chair John Walsh described the economy's resilience as "impressive" following Wednesday's Federal Open Market Committee meeting, singling out the strength of business investment as the "most striking" feature of the current expansion. Against the backdrop of ongoing shocks from the Iran conflict, the US economy has so far demonstrated considerable resistance to headwinds, though external uncertainties continue to cap the growth outlook.
Net exports weighed on headline growth, but consumer spending stands out
The 1.5% annualized GDP growth rate in the second quarter was significantly impacted by volatile net export figures. Such swings in trade data are not uncommon from quarter to quarter, and the latest decline partly masks the true vigor of domestic demand. Consumer spending, the backbone of the US economy accounting for roughly two-thirds of economic activity, expanded at a 3.2% pace in the second quarter. Separate data released Thursday showed real consumer spending rose 0.4% month-over-month in June, matching the increase from July 2025 and marking the strongest performance in nearly a year. Lower gasoline costs at the end of the quarter, higher-than-average tax refunds, and promotional offers helped sustain household spending. This provided a buffer against the negative effects of higher prices and dampened consumer confidence stemming from the Iran conflict.
AI investment boom serves as a key growth engine
Business investment maintained its strong momentum in the second quarter, becoming a vital pillar of economic expansion. The surge in artificial intelligence investment is the core driver behind this sustained growth in capital spending. Tech giants like Meta Platforms Inc and Microsoft Corp are aggressively building data centers and ramping up AI-related investments, even as some investors remain skeptical about the returns. This wave of AI capital expenditure has continued unabated despite the Federal Reserve's high-interest-rate environment, underscoring businesses' strong confidence in AI's long-term prospects and providing an additional supply-side boost to the current economic expansion.
Iran conflict impact persists, but inflation pressures ease
The primary external risk facing the economy stems from the Iran conflict. Since the outbreak of hostilities, energy and related prices have moved higher, weighing on consumer and business sentiment. However, a decline in gasoline prices toward the end of the quarter provided some breathing room for inflation data. The PCE price index fell 0.1% month-over-month in June, while core PCE edged up only 0.1%, keeping inflation relatively subdued. This gave the Federal Reserve the policy justification to hold interest rates steady at its Wednesday meeting. The full transmission effects of the war on the economy remain to be seen. Looking ahead, markets will closely monitor consumer spending and employment data to assess whether the US economy can continue to withstand external shocks.
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