US GDP growth slows to 1.5% as trade deficit widens, but consumer spending and AI investment provide support

Growth slows to 1.5% as trade gap widens

The US economy grew at a 1.5% annualized rate in the second quarter of 2026, the Commerce Department reported on Thursday. That was down from 2.1% in the first quarter and below the 2.1% consensus forecast in a Reuters poll of economists. A narrower measure that strips out volatile trade and inventory swings, real final sales to domestic purchasers, rose at a robust 3.9% pace, up from 1.7% in the prior quarter.

Trade subtracted more than a full percentage point from headline GDP. Imports rose 3.3% to $395.3 billion while exports fell 3.2% to $317.7 billion, pushing the monthly goods trade deficit to $77.6 billion in May, a 42% jump from April. Economists pointed to heavy imports of semiconductors, telecom gear and industrial equipment tied to the AI buildout as a key driver of the gap.

It's a classic supply shock. The combination of tariffs and oil price spikes is exactly what a macroeconomist would expect to happen.

Consumer spending accelerates

Consumer spending, which accounts for more than two-thirds of US economic activity, surged at a 3.2% annualized rate after abruptly slowing to 0.5% in the first quarter. Generous tax refunds from President Donald Trump's "One Big Beautiful Bill" provided a cushion, while higher-income households benefited from strong asset price gains. The recently ended FIFA World Cup tournament and midterm election-related spending by nonprofits also helped lift outlays.

The U.S. has been much more insulated from the economic fallout from the conflict in the Middle East than other parts of the world have been. The consumer is still spending and we have the ongoing frenzied tech investment cycle that we're seeing.

Economists cautioned that some of these tailwinds are fading. Households have been saving less and tapping savings to maintain spending as wages have barely kept up with inflation. Average gasoline prices have risen back above $4 a gallon, with AAA reporting $4.09 on Thursday, up from $3.84 a month earlier and $2.98 when the US and Israel first struck Iran on February 28.

AI investment boom drives business spending

Business investment increased at an 8.4% annualized rate, boosted by spending on equipment and intellectual property, categories that reflect the ongoing buildout of AI infrastructure. Equipment investment alone rose more than 15% in the quarter. Federal Reserve chairman Kevin Warsh called strong business investment the economy's "most striking feature" amid a surge in AI-related capital spending.

Data centres continue to drive investment and economic growth, increasing the sector's role in the economy while raising questions about its sustainability.

On Monday it was reported that Nvidia is in talks to make a $250 million investment in OpenAI, signalling that the investment cycle is likely to extend into the third quarter. Still, some analysts have raised concerns about circular financing propping up the sector.

Inflation and the Iran war

The Personal Consumption Expenditure price index, the Fed's preferred inflation gauge, rose 3.7% on an annual basis in June, down from 4.1% in May. The slowdown was marked by a brief retreat in gasoline prices during a temporary ceasefire in the Middle East. Gasoline hit $4.48 per gallon in May before falling to $3.96 by the end of June, only to climb again as hostilities resumed.

The US-led war with Iran, now in its sixth month, poses a downside risk to growth in the second half of the year, economists warned. Canada's prime minister Mark Carney has pursued new trade deals with China and Saudi Arabia as Trump's tariff policies push allies to diversify away from the US.

Fed holds rates, three dissent

The Federal Reserve on Wednesday left its benchmark overnight interest rate in a 3.50%-3.75% range. Three members of the policy-setting committee dissented, preferring a quarter-percentage-point hike. The Fed described economic activity as "expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East." The combination of still-elevated inflation and resilient growth has fuelled the case for keeping monetary policy restrictive.