U.S. GDP Growth Slows to 1.5% in Q2, Core GDP Strongest in Three Years

The U.S. economy, measured by real Gross Domestic Product (GDP), expanded at an annualized rate of 1.5% in the second quarter, falling short of the consensus forecast of 2.0% and the 2.1% growth recorded in the first quarter. While overall growth was moderate, a key underlying metric, "core" GDP, which combines personal consumption, business fixed investment, and home building, surged at a 3.9% annual rate. This marks the fastest pace for core GDP in over three years and represents a 2.6% increase from a year ago.

Personal consumption, which rose at a 3.2% rate, was the primary driver of economic growth during the period, contributing significantly to the overall GDP increase. Business investment in intellectual property and equipment also provided substantial positive contributions. Home building experienced a slight gain. Conversely, net exports and inventories acted as the largest drags on growth, with minor declines also observed in commercial construction and government purchases.

A notable factor in the second quarter’s economic activity was the ongoing build-out in artificial intelligence (AI) and data centers. Data center construction saw a 15.2% growth rate, business investment in information processing equipment increased by 8.3%, software investment grew by 11.4%, and research & development (R&D) expenditures were up 7.5%. Without the substantial impetus from this sector, real GDP growth would have been less than 1%.

Inflation remained a significant concern, with the GDP price index increasing at a 6.2% annual rate in Q2, bringing the year-over-year increase to 4.3%. This elevation in prices was largely attributed to rising oil costs. Consequently, nominal GDP, which includes the effects of inflation, rose at a 7.9% annual rate in Q2, representing a 6.5% increase from a year ago and a 5.6% annualized gain over the past two years. Future moderation in nominal GDP is anticipated; however, a continued high pace could prompt the Federal Reserve to consider further interest rate adjustments.

Supporting this expectation for moderation in nominal GDP, the M2 measure of the money supply has grown at a modest 4.8% annualized rate over the last two years. This is below both the recent nominal GDP growth and the 6.0% pre-pandemic pace that coincided with inflation averaging under 2.0%. In other economic news, new claims for unemployment insurance rose by 9,000 last week to a still low 197,000, while continuing claims fell by 7,000 to 1.782 million, suggesting continued moderate payroll growth in the upcoming July jobs report.

Key terms:

1. Real GDP: Gross Domestic Product adjusted for inflation, reflecting the actual output of goods and services in an economy.

2. Nominal GDP: Gross Domestic Product measured at current prices, without accounting for inflation.

3. Core GDP: A measure of economic activity that excludes volatile components like government spending, inventories, and international trade, focusing on underlying consumer and business demand.