Consumers, AI spending likely supported US economic growth in the second quarter

[WASHINGTON] The US economy likely maintained a steady pace of growth in the second quarter, supported by stronger consumer spending and robust business investment in equipment tied to the buildout of artificial intelligence infrastructure.

The Commerce Department’s advance gross domestic product report on Thursday (Jul 30) is expected to show the economy largely weathering the Middle East conflict, in part thanks to bigger tax refunds this year, which provided a cushion for consumers against higher gasoline prices stemming from the war.

But economists warned that the US-led war with Iran, now in its sixth month, posed a downside risk to growth in the second half of the year.

“The US has been much more insulated from the economic fallout from the conflict in the Middle East than other parts of the world have been,” said James Knightley, chief international economist at ING. “The consumer is still spending and we have the ongoing frenzied tech investment cycle that we’re seeing.”

A Reuters survey of economists forecast GDP likely increased at a 2.1 per cent annualised rate last quarter, which would match the January-March quarter’s pace.

Estimates ranged from as low as a 0.8 per cent rate to as high as a 2.9 per cent pace. The survey was, however, conducted before the release of June’s advance economic indicators report, which showed a moderate contraction in the goods trade deficit and retail inventories unchanged.

Economists at JPMorgan lowered their GDP growth estimate to a 1.5 per cent rate from a 2 per cent pace after the data.

Trade could subtract as much as a full percentage point from GDP growth, economists estimated. Inventories were a wild card.

Consumer spending, which accounts for more than two-thirds of US economic activity, likely accelerated after abruptly slowing to a 0.5 per cent growth pace in the first quarter.

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In addition to generous tax refunds from President Donald Trump’s “One Big Beautiful Bill”, higher-income households who are benefiting from strong growth in asset prices are also driving spending.

The recently ended Fifa World Cup tournament also helped to spur spending as did midterm election-related spending by nonprofits.

Economists are bracing for a slowdown in consumer spending as some of these tailwinds fade. Average petrol prices have risen back above US$4 a gallon amid renewed hostilities in the Middle East.

Households have been tapping savings and saving less to maintain spending as wages have barely kept up with inflation, a situation that economists said could not continue indefinitely. The saving rate is near a four-year low of 3 per cent.

Strong growth in domestic demand

“While the boost from higher tax refunds and lower tax payments appears to have provided a US$140 billion boost to household income during the 2026 tax-filing season, we expect that higher energy prices will erode household spending power for the rest of the year, particularly for lower-income households that spend a larger share of their budget on energy,” said Joseph Briggs, an economist at Goldman Sachs.

Briggs forecast the saving rate increasing to 3.5 per cent by year-end, “on the back of a stronger precautionary saving motive.”

Another quarter of double-digit growth in business spending on equipment was expected, with the AI investment boom showing no signs of slowing despite investor concerns that valuations of many technology companies have become stretched.

The rapid growth in AI is masking weakness in business investment in structures, like factories, which is expected to have contracted for a 10th straight quarter.

Still, the strength in both consumer and overall business spending was expected to have lifted domestic demand last quarter.

Final sales to private domestic purchasers, which exclude government, trade and inventories, increased at a 1.7 per cent pace in the first quarter. This measure is closely watched by officials at the Federal Reserve.

The US central bank on Wednesday left its benchmark overnight interest rate in a 3.5 to 3.75 per cent range. Three members of the Fed’s policy-setting committee dissented. They “preferred” a quarter-percentage-point hike.

Economists expect the Fed to raise interest rates as soon as September to quell inflation, which also factors into their expectations for slower growth in the second half.

“The Fed is going to become increasingly impatient with inflation, thanks to this war,” said Brian Bethune, an economics professor at Boston College. “We’ve already had an effective tightening of monetary policy because of the steepening of the (Treasury) yield curve and mortgage rates are up at least a half a point since the start of the war.”

Residential investment, which includes homebuilding and sales, is expected to have contracted for the sixth consecutive quarter. No boost to government spending was expected from the war, with defense outlays expected to have been flat.

“Action against Iran mostly has drawn on existing personnel and military assets, and running down pre-existing stockpiles of munitions, rather than on a widespread recruitment drive or heavy investment in new equipment,” said Samuel Tombs, chief US economist at Pantheon Macroeconomics.

“The 1990-91 Gulf War had a barely perceptible impact in the national accounts, despite being a far bigger operation.” REUTERS