Consumer spending soared in the second quarter. A repeat is unlikely.
A boom in data-center construction across the country has fueled U.S. economic growth.
Don't pay much attention to a seemingly soft 1.5% annual rate of growth for the U.S. economy in the spring. The economy did all right - and it's still growing at a stable pace.
The latest update to U.S. gross domestic product, the official scorecard of the economy, showed no change in the second quarter rate of growth.
If the economy really grew just 1.5%, it would be well below average. Yet GDP was held down by a big increase in the trade deficit and a slower increase in inventories, or unsold goods. These two categories often gyrate up and down and exaggerate changes in GDP.
The best way to look at growth is to examine consumer spending and business investment, the two main pillars of the economy. And both were quite strong in the second quarter.
The increase in consumer spending was revised up to show a frothy 3.4% annual increase, instead of 3.2% as originally reported. That matches the biggest increase in almost two years, and it was nearly double the normal rate of spending.
Consumer spending accounts for about 70% of everything that goes on in the U.S. economy.
Business investment accounts for about 19% of GDP, making it the next-largest peg. Companies boosted spending on new equipment, buildings, software and the like by a strong 8.5% in the second quarter.
High corporate profits are fueling the investment: Adjusted pretax earnings in the second quarter surged 9%.
"Healthy profit growth continues to free up cash that is, in turn, helping support business investment spending," especially on artificial intelligence, said Richard Moody, chief economist at Regions Financial.
The result of strong consumer and business spending is that GDP would have grown almost 3% in inflation-adjusted terms in the second quarter had the trade deficit and inventories been neutral.
"The details of the report looked strong with an upward revision in real consumer spending," said Scott Anderson, chief U.S. economist at BMO Capital Markets.
Second-quarter results, of course, don't reveal much about where the economy is headed. GDP suggested the U.S. economy had momentum entering the third quarter, but it doesn't reveal whether it's sustainable.
The first few glimpses at the economy in the third quarter appear to show Americans scaling back after splurging in the spring. Spending earlier in the year was boosted by larger-than-usual tax refunds and the 2026 World Cup, economists say.
In July, consumer spending rose a meager 0.2%, and it was flat after taking inflation into account.
Cheaper gas helped explain part of the slowdown in spending, but households also increased their savings. They had dipped into their savings in the spring to cope with high inflation.
Business investment, on the other hand, remained torrid. Companies are spending hundreds of billions of dollars on AI, a boom that shows little sign of slowing.
The trade deficit, what's more, is unlikely to depress GDP in the third quarter. There are also signs that companies are rebuilding inventories.
As a result, third-quarter GDP could end up looking pretty good, even if the details point to a partial cooling off.
The key to watch, as always, is consumer spending. It's almost certain to decelerate from the 3.4% increase in the second quarter.
Higher gas prices won't help. Nor will the potential for new trade wars with Canada and other countries. But any number around 2% would suggest the U.S. economy is still doing OK.
-Jeffry Bartash
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