The U.S. economy slowed at a 1.5 percent annualized rate in the second quarter of 2026 as stronger consumer spending and artificial intelligence-related investment helped maintain domestic demand despite a widening trade deficit. The Commerce Department’s Bureau of Economic Analysis published the advance estimate.
The pace moderated from 2.1 percent in the first quarter and came below the 2.1 percent consensus in a Reuters survey. Forecasts had ranged from 0.8 percent to 2.9 percent.
The survey was conducted before June’s advance economic indicators showed a moderate contraction in the goods trade deficit and unchanged retail inventories. Those figures prompted some economists to reduce their estimates by as much as 0.8 percentage point, with several lowering their forecasts to 1.5 percent.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated to a 3.2 percent annualized rate from 0.5 percent during the January-to-March period. The rebound indicated that household demand remained an important source of economic support despite the conflict in the Middle East and its effect on energy costs.
Larger tax refunds in 2026 gave consumers an additional cushion against gasoline prices pushed higher by the war. Reuters linked the refunds to President Donald Trump’s One Big Beautiful Bill.
Higher-income households also continued spending as stronger asset prices lifted wealth. Activity surrounding the recently concluded FIFA World Cup probably supported expenditure, while nonprofit organizations’ spending connected to the midterm elections provided another contribution.
Business investment in equipment remained robust as companies continued building artificial intelligence infrastructure. The AI investment boom showed little sign of slowing even as investors questioned whether valuations across parts of the technology sector had become stretched.
AI investment supports
That capital spending helped sustain domestic demand and provided an offset to weaker contributions elsewhere in the economy. However, economists warned that the U.S.-led war with Iran, which had entered its sixth month, could weaken demand and overall economic growth during the second half.
Investment in AI-linked equipment was therefore a central reason domestic demand looked stronger than the headline GDP growth rate, which was held down by the widening trade gap.
The Federal Reserve maintained its benchmark overnight interest-rate target at between 3.50 percent and 3.75 percent. Three members of the central bank’s policy-setting committee dissented because they preferred a quarter-percentage-point increase.
The split highlighted concern that persistent price pressures could require tighter policy even as aggregate growth eased further ahead.
The Fed said economic activity was expanding at a solid pace despite elevated uncertainty partly associated with the Middle East conflict.
Economists expected the Fed could raise interest rates as early as September to contain inflation. That possibility also contributed to expectations that economic growth would lose some momentum during the second half.
Average gasoline prices climbed back above $4 per gallon as hostilities in the Middle East intensified again. Wages were barely keeping pace with inflation, leading households to draw on savings and reduce the proportion of income they set aside to maintain their spending.
Economists said that pattern could not continue indefinitely. Some expected households to become more cautious and rebuild savings because of the uncertain economic environment, potentially limiting consumer spending later in the year.
Earlier growth signals
The second-quarter report followed a stronger-than-initially-estimated opening to 2026. The Bureau of Economic Analysis said in its third Q1 estimate that real GDP grew at a 2.1 percent annualized rate, revised upward by 0.5 percentage point. The change primarily reflected a downward revision to imports, partly offset by weaker consumer spending. Investment, exports, government spending and consumption all contributed to growth. Real final sales to private domestic purchasers rose 1.7 percent, while real gross domestic income increased 1.2 percent. Corporate profits from current production advanced $74.4 billion during the quarter.
From an industry perspective, real value added increased 7.5 percent for government, 4.5 percent for private goods-producing industries and 0.8 percent for private services-producing industries. Information, the federal government, professional, scientific and technical services, and durable-goods manufacturing were the leading contributors. Retail trade, wholesale trade, and finance and insurance recorded the largest offsets.
The first-quarter price data showed the challenge facing monetary policymakers. The gross domestic purchases price index rose 3.6 percent, while the personal consumption expenditures price index increased 4.6 percent. Core PCE prices, excluding food and energy, climbed 4.4 percent. Those readings followed a fourth quarter in which GDP expanded 0.5 percent. Consumer spending and investment supported output, while government spending and exports declined. Real gross domestic income rose 2.6 percent and corporate profits increased $246.9 billion. Private demand increased 1.8 percent in the fourth quarter. The gross domestic purchases price index rose 3.7 percent, while PCE inflation was 2.9 percent and core PCE inflation reached 2.7 percent.
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Income and investment
Earlier household data also pointed to resilient spending but a thinner savings cushion. In its May report, the BEA said personal income increased $181.6 billion, or 0.7 percent, while disposable income rose $164.9 billion. Personal consumption expenditures advanced $156.1 billion, including increases of $94.3 billion in services and $61.8 billion in goods. Real spending increased 0.3 percent monthly. Personal savings totaled $704.2 billion, leaving the savings rate at 3.0 percent.
Manufacturing indicators offered further evidence of business investment momentum. The Census Bureau’s June release showed durable-goods orders increasing $1.1 billion, or 0.3 percent, to $334.8 billion. Orders excluding transportation rose 0.6 percent, while those excluding defense gained 0.3 percent. Computers and electronic products led the advance, climbing $0.9 billion, or 3.1 percent, to $31.1 billion. The category had increased in nine of the previous 10 months, supporting the view that technology and AI-related capital expenditure remained a significant economic driver.
