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. But a look under the hood shows the economy is humming along.

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 swelled 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 products related to the AI boom far outstripped exports. The trade gap shrunk slightly in June.

But consumer spending, which is 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 slightly from the prior quarter’s 10.6%.

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

“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 — real final sales to private domestic purchasers — 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 heading into the summer as the World Cup drew tourists from around the world and businesses continued to invest in AI. According to Bank of America, in-person spending rose 5% on a yearly basis across the cities that hosted a game, which included 11 of the largest American cities, such as New York, Los Angeles, and Houston. Restaurants and bars saw some of the largest gains.

But it wasn’t a completely rosy picture in the second quarter. The Iran war, which intensified this month, jacked up inflation, though inflation-adjusted earning rose above negative territory when price increases slowed sharply in June. The war has also made it difficult for consumers, businesses and policymakers to plan ahead. Consumer sentiment

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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