US economy sustained moderate Q2 growth as consumers and AI investment prop up demand

Preliminary data suggest Q2 growth held up on consumer spending and AI investment, but geopolitical risks could change the trajectory later this year. Washington, July 30 – The U.S. economy, according to preliminary estimates, likely supported moderate growth in the second quarter, driven by rising consumer demand and active business investment in equipment related to deploying artificial intelligence infrastructure. The advance GDP report from the Department of Commerce for the previous quarter is expected to show that the economy largely withstood the impact of the conflict in the Middle East, partly thanks to more generous tax rebates this year that provided a cushion for consumers amid higher fuel prices due to the war. However, economists warn that the war with Iran, now in its sixth month, poses a risk of slowing growth in the second half of the year. The United States has felt the economic consequences of the conflict in the Middle East far less than other parts of the world, said James Knightley, ING’s chief international economist. Consumers are still spending money, and we are watching an active cycle of investment in technology. – James Knightley Economist surveys expect that GDP in the last quarter rose about 2.1% annualized, in line with the January–March pace. Estimates ranged from 0.8% to 2.9%. The mentioned survey was conducted before the publication of June growth indicators, which showed a moderate narrowing of the trade deficit and steady inventories. JPMorgan economists lowered their GDP growth estimates to 1.5% from 2.0% after these data. Trade could subtract up to one full percentage point from GDP growth; inventories remain an uncertain factor. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, likely accelerated after slowing to 0.5% in the first quarter. In addition to the generous tax rebates under Donald Trump’s “One Big Beautiful Bill” plan, high-income households that benefit from rising asset prices are also supporting consumption. The recently concluded FIFA World Cup also stimulated spending, as did spending by non-governmental organizations in connection with the midterm elections. Economists expect the pace of growth in consumer demand to slow after these factors run their course. The average gasoline price rebounded above $4 a gallon as tensions in the Middle East renewed. Households are drawing on savings and moderating the pace of savings to support spending, as wages barely keep up with inflation; the saving rate is declining and near a four-year low of about 3.0%. STRONG GROWTH IN DOMESTIC DEMAND “Although increases in income from tax rebates and lower taxes, as seems to be the case, thanks to the 2026 tax season, have provided about $140 billion of additional income to households, we expect higher energy prices to reduce their purchasing power for the rest of the year, especially for lower-income families who spend a larger share of their budget on energy,” said Joseph Briggs, economist at Goldman Sachs. Briggs projects that by year-end the savings rate will rise to 3.5% due to rising caution among the population regarding the economy. Another quarter is expected with double-digit growth in business spending on equipment, and the AI investment wave shows no signs of slowing, despite concerns about the overvaluation of many tech companies. The rapid growth in AI investments hides weaknesses in business investments in assets, such as factories, which, according to estimates, may have declined over the past decade. Nevertheless, growth in both consumer demand and overall business demand likely lifted domestic demand in the previous quarter. Final purchases by private demand rose by 1.7%. This indicator is closely watched by the Federal Reserve System. It left the federal funds rate in the range of 3.50–3.75%, but three members of the Federal Reserve Committee voiced opinions in favor of further rate hikes. Analysts expect the Fed to raise rates as early as September to curb inflation, which would also affect growth rates in the second half of the year. The Fed will become increasingly impatient with inflation due to this war. We have already felt the practical constraint on monetary policy through the steepening of the yield curve and the rise in mortgage rates by at least half a percentage point since the war began. – Brian Betyun Investments in the housing sector, including construction and home sales, are likely to contract for the sixth straight quarter. The war does not bring higher government spending, and defense outlays will remain at a steady level. Action against Iran largely relies on existing personnel and military resources and reducing stockpiles of munitions, rather than on a mass recruitment campaign or substantial spending on new equipment, explained Samuel Tombs, the chief US economist at Pantheon Macroeconomics. The 1990–1991 Gulf War had an almost negligible impact on the national accounts, despite the operation being much larger in scale. – Samuel Tombs In summary, the U.S. economy seems likely to continue showing moderate growth in the second quarter thanks to strong domestic demand and active investments in technology, but the pace of growth depends on how the global situation unfolds, particularly the impact of the war and the dynamics of consumer spending in the coming months.