The US economy expanded more slowly than expected during the second quarter of 2026, but the headline figure concealed surprisingly strong spending by households and businesses.
Real gross domestic product increased at an annualised rate of 1.5 percent between April and June, down from 2.1 percent in the first quarter. Economists surveyed before the release had generally anticipated growth of around 2.1 percent. The advance estimate from the US Bureau of Economic Analysis showed that rising imports, shrinking inventories and lower government spending restrained overall growth.
Beneath those volatile components, however, consumers increased spending sharply and businesses continued pouring money into equipment associated with artificial intelligence, data centres and advanced computing. A measure designed to capture underlying private-sector demand grew at its fastest rate in more than three years.
The result describes an economy that is still expanding rather than one approaching an immediate recession. It also reveals several vulnerabilities, including low household saving, elevated inflation and growing dependence on technology investment.
What the 1.5 Percent Growth Rate Means
The quarterly GDP figure is reported at a seasonally adjusted annual rate. It indicates how quickly the economy would grow over a full year if the second quarter’s pace continued for four consecutive quarters. The economy did not literally expand by 1.5 percent during the three-month period; the non-annualised quarterly increase was approximately 0.4 percent.
GDP measures the inflation-adjusted value of final goods and services produced in the United States. Its major components include consumer spending, business and residential investment, government expenditure and net exports.
The second-quarter slowdown was not caused primarily by households reducing purchases. Consumer spending, investment and exports all contributed positively to growth. Those increases were partly offset by declining government spending, while imports rose considerably. Imports are subtracted when GDP is calculated because they represent goods and services produced outside the United States.
That accounting treatment can make the economy appear weaker when Americans and US businesses are buying large quantities of foreign products. It does not mean imports are inherently damaging, but it does mean they do not represent domestic production.
Consumer Spending Rebounded Sharply
Consumer spending increased at a 3.2 percent annualised rate during the second quarter, compared with growth of only 0.5 percent during the first three months of the year. Because household consumption accounts for more than two-thirds of US economic activity, the rebound provided substantial support to the economy.
Spending increased across both goods and services. The BEA identified prescription drugs, light trucks, furniture, restaurants, accommodation, financial services and nonprofit activity among the leading contributors. The breadth of these increases suggests that demand was not restricted to one unusually strong industry.
Larger tax refunds supported household income during the filing season, while rising financial markets encouraged spending among wealthier consumers. Events such as the FIFA World Cup and political activity ahead of the US midterm elections may also have added temporarily to service-sector spending.
The strength does not necessarily mean every household is financially comfortable. Spending can remain high even when consumers are saving less, drawing down previous savings or relying more heavily on credit.
Low Saving Creates a Warning Sign
The separate BEA personal-income report for June showed that personal income increased by just 0.2 percent during the month, while consumer spending rose by 0.3 percent. The personal saving rate fell to 2.7 percent, its lowest level in approximately four years.
A low saving rate does not automatically signal an imminent downturn, particularly when employment and household wealth remain supportive. It does indicate that consumers have a smaller financial cushion against job losses, higher fuel prices or unexpected expenses.
The tax-refund boost is also unlikely to continue through the remainder of the year. Higher gasoline prices and slower income growth could force households to become more selective, especially lower-income consumers who spend a larger proportion of their earnings on energy, food and housing.
Consumer spending may therefore remain positive while growing more slowly during the second half of 2026.
AI Investment Is Becoming a Major Economic Driver
Business spending on equipment increased at a 15.2 percent annualised rate, marking a second consecutive quarter of double-digit growth. Much of that strength was linked to the continuing construction of AI infrastructure.
Technology companies, cloud providers and data-centre operators are purchasing semiconductors, servers, networking equipment, cooling systems and electricity infrastructure to train and operate increasingly powerful AI models.
The BEA reported particularly strong investment in industrial equipment, transportation equipment and information-processing equipment. Spending on intellectual property also increased, supported by software and research and development.
This investment can increase productive capacity and potentially support future improvements in efficiency. It also makes the economy more dependent on whether companies continue believing that AI-related revenue will justify today’s enormous expenditure.
Business investment outside technology was less impressive. Spending on nonresidential structures declined, led by weaker investment in manufacturing buildings. That contrast suggests that the corporate economy is not expanding uniformly; AI and digital infrastructure are providing an outsized share of momentum.
Imports and Inventories Weighed on GDP
The trade deficit subtracted approximately 1.01 percentage points from second-quarter GDP growth, according to Reuters’ analysis of the government figures. Imports recorded another double-digit increase, driven partly by telecommunications equipment, semiconductors, industrial machinery and other capital goods.
The same AI investment supporting domestic business demand is therefore also increasing imports because many essential components are manufactured overseas.
Companies may additionally have accelerated orders because of uncertainty surrounding tariffs and the Middle East conflict. Importing goods before tariffs, transportation costs or energy prices rise can protect businesses temporarily, but it can produce large swings in quarterly trade data.
Normally, a surge in imports might be accompanied by an increase in business inventories. Instead, inventories continued declining as demand exceeded available domestic supply. Lower inventory accumulation subtracted another 0.67 percentage point from GDP growth.
This combination supports the argument that the 1.5 percent headline rate understates private-sector demand. Consumers and companies were purchasing faster than domestic production and existing stock could fully accommodate.
The Strongest Number Was 3.9 Percent
A closely watched measure called real final sales to private domestic purchasers increased at a 3.9 percent annualised rate, up from 1.7 percent in the first quarter. This was its strongest increase since early 2023.
The measure combines consumer spending and private fixed investment while excluding inventories, government spending and net exports. Economists often examine it because trade and inventories can fluctuate sharply and temporarily distort headline GDP.
Growth of 3.9 percent indicates that demand generated by US households and businesses remained robust during the quarter. It is the main reason the GDP report was stronger than the 1.5 percent headline initially suggested.
Even so, strong demand can create another challenge when the economy cannot increase supply quickly enough: inflation.
Inflation Complicates the Federal Reserve’s Decision
The GDP report contained uncomfortable price figures. The gross domestic purchases price index rose at a 5.7 percent annualised pace, compared with 3.6 percent during the first quarter. The PCE price index increased at a 5.1 percent quarterly rate, while core PCE inflation excluding food and energy rose at a 3.4 percent rate.
Monthly data provided a somewhat more encouraging picture. Overall PCE prices declined by 0.1 percent in June, while core prices increased by 0.1 percent. Compared with June 2025, headline PCE inflation was 3.7 percent and core inflation was 3.3 percent—still above the Federal Reserve’s 2 percent objective.
The Federal Reserve has maintained its federal funds target range at 3.5 to 3.75 percent. Its July Monetary Policy Report described economic activity as solid while acknowledging that inflation remained elevated and partly affected by energy-related supply shocks.
Strong private demand gives the central bank less reason to cut interest rates quickly. Persistent inflation could instead strengthen the argument for keeping rates high or raising them further, although tighter financial conditions would eventually place more pressure on housing, consumer credit and business investment.
The Economy Is Resilient but Increasingly Uneven
The second-quarter figures do not show an economy in collapse. Consumers continued spending, companies invested heavily and private domestic demand accelerated significantly.
They also reveal a less comfortable foundation. Household saving is low, income growth has cooled and higher energy costs could weaken future consumption. AI investment is exceptionally strong, but other forms of business construction remain subdued. Inflation is still above target, limiting the Federal Reserve’s ability to support growth through lower borrowing costs.
The 1.5 percent growth rate should therefore be interpreted neither as evidence of a recession nor as proof that the economy is free from risk. The underlying economy was stronger than the headline number, but several of the forces supporting it may not be sustainable indefinitely.
The figures are also preliminary. The BEA will publish its second estimate on August 26, when additional trade, construction, inventory and spending data could revise the growth rate in either direction.
