The US economy grew at a weaker-than-expected pace in the second quarter even with a pick-up in in consumer spending and solid business investment.

Inflation-adjusted gross domestic product (GDP) rose by an annualised 1.5% in the June quarter, according to an advance estimate issued today by America’s Bureau of Economic Analysis (BEA). This reflects a marked deceleration from the start of the year in part due to a surge in imports.

Consumer spending, which comprises about two-thirds of economic activity, rose at a stronger-than-expected 3.2% rate. Business investment continued to boom amid a rush to invest in artificial intelligence. 

A narrower metric of underlying demand known as final sales to private domestic purchasers climbed 3.9% in the second quarter, more than double the first quarter pace and the strongest since early 2023. This measure excludes net exports, inventories and government spending. 

Economic resilience from Iran war

The figures highlight an economy that’s so far powering through the fallout of the Iran war. Net exports subtracted a percentage point from the calculation of GDP in the second quarter.

That likely reflected a mix of factors, including efforts to get goods into the country before a new wave of tariffs and the rapid pace of capital investment. Inventories stripped an additional 0.67 percentage point from GDP, suggesting many businesses drew down their inventories during the war.

While the conflict has pushed prices higher and weighed on sentiment, a slide in gasoline costs at the end of the quarter alongside higher-than-usual tax refunds and sales promotions helped support household spending. Separate data out today showed inflation-adjusted consumer spending climbed a robust 0.4% in June, matching the strongest since July 2025. 

Consumer spending powering economy

The strength in household outlays was fueled by spending on durable goods like furnishings and motor vehicles. Within services, consumers ramped up outlays on discretionary categories like recreation and food services and accommodation.

The BEA says non-residential fixed investment rose 8.4%, while Investment in industrial equipment surged by the most since 2011. The outlays for transportation equipment jumped by the most in two years. 

Information processing equipment and software outlays rose at a strong, albeit slower rate. The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures price index, fell 0.1% last month.  

Excluding food and energy, the gauge rose less than forecast. Business investment remained a key driver of growth in the second quarter.  

Surge in AI investment 

The massive AI investment push continued to play a critical role as did demand for industrial and transportation equipment. After the Fed decided to keep interest rates unchanged on yesterday, Chairman Kevin Warsh described the economy’s resilience as “impressive” but noted its “most striking” feature is the strength of business investment.

Big technology firms including Meta Platforms Inc. and Microsoft Corp. are aggressively building out data centers and investing in AI, despite investors’ concerns about whether it will pay off.