US Economic Growth Slows in Second Quarter Amid AI-Driven Demand
The US economy experienced a slowdown in growth during the second quarter, according to a report from the Commerce Department. Despite the moderation, robust consumer spending and business investment related to the buildout of artificial intelligence infrastructure underscored strong domestic demand.
Source: s.yimg.com
The moderation in economic growth was largely due to a widening in the trade deficit, which sliced off 1.01 percentage points from GDP growth. This is the largest trade deficit contribution to GDP growth since the first quarter of 2025.
The report also highlighted the continued inventory drawdown to meet the strong domestic demand. Inventories subtracted 0.67 percentage point from GDP growth. Government spending contracted at a 0.8% pace, imposing a small drag on GDP growth.
However, consumer spending, which accounts for more than two-thirds of US economic activity, surged at a 3.2% rate. This was driven by larger tax refunds, higher-income households benefiting from strong growth in asset prices, and midterm election-related spending by nonprofits. The AI investment boom also contributed to the boost in domestic demand, with business spending on equipment increasing at a 15.2% pace.
Despite the strong domestic demand, the economy faces challenges in the second half of the year. The escalation of the Middle East conflict poses a downside risk to growth, and the recent stock market sell-off could slow the momentum in consumer spending.
The Federal Reserve on Wednesday left its benchmark overnight interest rate in a 3.50%-3.75% range. Three members of the US central bank’s policy-setting committee dissented, preferring a quarter-percentage-point hike.
The Fed described economic activity as ‘expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East.’ Economists expected the Fed to raise interest rates as soon as September to quell inflation, which also factored into their expectations for slower economic growth in the second half.
The strength in demand last quarter was accompanied by a surge in inflation. The price index for gross domestic purchases, a key measure of inflation in the US economy, increased at a 5.7% pace. This was the fastest in four years and followed a 3.6% rate of increase in the first quarter.
Excluding food and energy, the so-called core PCE inflation increased at a 3.4% pace. The Fed tracks the PCE inflation measures for its 2% target. Though other data from the BEA on Thursday showed PCE inflation easing in June, economists shrugged off the moderation and expected price pressures to rise due to the escalation in the Middle East conflict.
