U.S. Economic Growth Slowed to 1.5% in Second Quarter -- 5th Update

By Harriet Torry

U.S. economic growth slowed in the second quarter, weighed down by rising imports to fuel the U.S. artificial-intelligence boom and decreased government spending.

At the same time, consumers shrugged off a surge in gas prices fueled by the conflict with Iran and increased their spending.

Within the numbers, household spending increased this spring at its strongest pace since the third quarter of last year. And business investment remained strong as companies kept investing in IT equipment and software for the AI build-out.

Data-center builders rely heavily on imports like semiconductor chips, and those imports count against the U.S. growth calculation because the products aren't made in the U.S.

The numbers

The Commerce Department said Thursday U.S. gross domestic product -- the value of all goods and services produced across the economy, adjusted for inflation and seasonal changes -- rose at a 1.5% annual rate in the second quarter.

Economists surveyed by The Wall Street Journal had expected GDP growth of 1.8% for the April to June period. The economy grew at a 2.1% pace in the first quarter.

Consumer spending

Consumer spending, the economy's main engine, rose at a 3.2% pace in the second quarter, picking up from 0.5% in the first quarter of this year. Consumers -- buoyed by tax cuts -- increased their spending on both goods and services.

Under the hood

A measure of underlying demand in the economy strengthened despite uncertainties around the war in Iran and the Trump administration's tariff policies.

Called final sales to private domestic purchasers, this measure rose at a 3.9% rate in the second quarter, up from 1.7% in the prior quarter and the fastest pace since the first quarter of 2023. The measure carves out the more volatile government, inventory and international trade data.

Trade impact

GDP reflects the total of all spending. But since some of that spending is on imported products, rather than things made in the U.S., imports are considered a drag on GDP. And the more consumption goes toward imports, the larger the drag.

That math played a role in the second quarter, when net exports -- a measure of what the U.S. exports minus what it imports -- subtracted a percentage point from the headline GDP number. Inventory investment also weighed on growth last quarter as businesses slowed stockpiling.

Part of this stems from the AI boom, which has boosted demand for foreign-made computer equipment and semiconductors.

Speaking to the Senate Finance Committee last week, U.S. Trade Representative Jamieson Greer welcomed higher imports of "the type of goods that help us produce even more here."

"We have shifted the bulk of our imports from consumer goods and autos to the things we need to scale reindustrialization, like machine tools, injection molding equipment and AI chips," he said.

Middle East risk

The conflict with Iran posed some challenges for the U.S. economy in the April-to-June quarter by significantly raising fuel costs and inflation that ate into households' wages. Regular gasoline averaged $4.22 a gallon in the second quarter, according to AAA data, up from less than $3 a gallon before the U.S. and Israel launched the war on Iran at the end of February.

Economists say an energy-price shock is the main risk to the economy heading into the second half of the year, since a pickup in inflation could prompt the Federal Reserve to tighten interest rates. Renewed tensions pushed up oil and gasoline prices for much of July.

Pressure building at the Fed

The GDP report came a day after Fed officials voted Wednesday to hold the central bank's benchmark interest rate steady, in a range of 3.5% to 3.75%. The decision came in a 9-3 vote as three bank presidents dissented in favor of a quarter-point rate increase, a sign of heightened tension over inflation.

Fed Chairman Kevin Warsh characterized the economy and labor market in broadly positive terms, noting strength in productivity and investment in artificial intelligence.

"The economy is showing impressive resilience," Warsh said during his postmeeting press conference.

Signs of strength

Job gains were steady in the second quarter, and the unemployment rate remained low. Beyond the impact of gas prices, Americans got a break on inflation in June: Excluding food and energy products, prices were broadly flat, according to the Labor Department.

And while gas prices rose again this month, recently topping $4.10, they remain below the postwar high above $4.50 hit in May.

The corporate view

Some companies cautioned that shoppers are increasingly price-sensitive amid high inflation. "The consumer is muted, but stable," Procter & Gamble's chief financial officer Andre Schulten told The Journal this week. "Every consumer is looking for value."

Still, major companies that have issued quarterly results thus far have largely reported strong sales and earnings, marking a sign that consumers, supported by a still-low unemployment rate, remain willing to spend.

American Express posted higher sales and profit in the second quarter, thanks to higher spending among its credit-card members. And toy maker Hasbro last week lifted its outlook for the year, pointing to strong demand for games and toys.

--Photo credit: Chris Torres/EPA/Shutterstock

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

July 30, 2026 09:47 ET (13:47 GMT)