The **United States Bureau of Economic Analysis (BEA) released its revised estimate of second-quarter Gross Domestic Product (GDP) on Thursday, showing growth at 1.5% annualized rate, significantly revised down from the 2.1% preliminary estimate and missing the 2.1% consensus forecast. According to the latest data from the BEA, this revised performance signals continued resilience despite the conflict in the Middle East, elevated gasoline prices, and the impact of tariffs. The Q1 2026 GDP was revised up to 2.1% from the initial 1.6% estimate, demonstrating stronger momentum than previously anticipated. The Atlanta Fed's GDPNow model had previously forecast a 1.6% expansion in Q2 GDP as of its July 27 update, down from 1.7% set on July 17. Economists polled by Reuters had forecast GDP rising at a 2.1% pace, with estimates ranging from a 0.8% rate to a 2.9% pace, though some had cut their estimates by as much as 0.8 percentage point to as low as a 1.5% rate following the release of June's advance economic indicators report.
Consumer spending accelerated to 3.2% in Q2 from 0.5% in the previous quarter, driven by larger tax refunds and the FIFA World Cup providing additional support. As reported by The Times of India, consumer spending, which accounts for about 70% of US economic activity, accelerated sharply to a 3.2% annual pace from just 0.5% in the January-March period, with household spending remaining the biggest support for the economy during the quarter. Business spending on equipment likely posted another quarter of double-digit growth at 15.2%, driven by continued investment in AI-related technologies, though this was slightly down from 15.8% in Q1. However, investment in structures contracted for a tenth consecutive quarter at -5%, while residential investment rose 1.5%, marking its first increase in six quarters. Businesses also continued to invest despite slower headline growth, with investment outside the housing sector increasing at an annual pace of 8.4%, down from 10.6% in the first quarter but remaining strong, reflecting a surge in artificial intelligence-related investment. Net trade exerted a larger drag at -1.01 percentage points due to a slowdown in export growth to 4.5% from 10.9% previously, while import growth remained strong at 11.5%.
The Bureau of Economic Analysis's advance estimate shows inflation-adjusted GDP increased an annualized 1.5% in the second quarter, but economists emphasize that underlying demand remains robust despite the headline figure. According to The Times of India, a broader measure of the economy's underlying strength also pointed to resilience, with the economy expanding at a 3.9% annual rate when excluding the volatile effects of government spending and trade, improving from 1.7% in the previous quarter. This measure demonstrates that the decline in net exports, which can be volatile from quarter to quarter, masked strength in underlying demand. The report highlights an economy that's so far powering through the fallout of the Iran war, with the conflict having pushed prices higher and weighed on sentiment, but 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 Thursday showed inflation-adjusted consumer spending climbed a robust 0.4% in June, matching the strongest since July 2025, while the Federal Reserve's preferred measure of inflation — the personal consumption expenditures price index — rose 3.7% from June 2025, easing from a 4.1% year-on-year increase in May. On a monthly basis, prices fell 0.1% between May and June, helped by a 9.2% decline in gasoline and other energy prices.
The massive AI investment push is playing a critical role in driving economic growth, with big technology firms including Meta Platforms Inc. and Microsoft Corp. aggressively building out data centers and investing in AI, despite investors' concerns about whether it will pay off. As reported by The Times of India, after the Fed decided to keep interest rates unchanged on Wednesday, Chairman Kevin Warsh described the economy's resilience as "impressive" but noted the "most striking" feature of the economy is the strength of business investment. AI investment remains a powerful growth story, but the import surge underpinning the buildout is a reminder that an AI boom does not automatically translate into an equally large boost to US GDP, according to Olu Sonola, head of US economics at Fitch Ratings. Business investment remained a key driver of growth in the second quarter, with the AI investment boom showing no signs of slowing despite investor concerns that valuations of many technology companies have become stretched. The AI investment boom is also helping to prop up domestic demand, providing a tailwind for the current economic recovery. Investment continues to grow nicely, with tech investment still leading the way, although non-tech business investment also showed renewed vigour, with even residential investment making a positive contribution after a torrid run.
Inventories stripped an additional 0.67 percentage point from GDP, suggesting many businesses drew down their inventories during the war period. Imports emerged as the biggest drag on growth, with imports climbing at an annual rate of 11.5%, contributing to a 1.5 percentage point reduction in GDP growth as GDP measures only what is produced within the United States. Net exports subtracted a percentage point from the calculation of GDP in the second quarter, likely reflecting 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. Government spending fell by 0.8%, which is likely a legacy of the huge swings seen over the previous two quarters linked to the prolonged government shutdown late last year. The US Dollar Index (DXY) is trading in the upper end of its multi-month range, well north of the 101.00 barrier, with the positive outlook expected to remain unchanged while above its 200-day SMA near 99.10. However, economists warned that the U.S.-led war with Iran, now in its sixth month, posed a downside risk to demand and ultimately economic growth in the second half of the year.
