Economy is poised to show strong second-quarter growth - but only after a look under the hood

By Jeffry Bartash

Consumers and businesses spent plenty of cash, in a boost to GDP

The U.S. economy got a boost from the World Cup and suffered little damage from the Iran war in the second quarter.

The U.S. economy churned out another robust rate of growth in the second quarter even as the Iran war boosted inflation, but that might not be so readily apparent in the latest report on gross domestic product.

GDP, the official scorecard of the economy, is forecast to rise at a ho-hum annual pace of 1.8% in the three months from April to June. The second-quarter report comes out Thursday morning.

If the forecast is correct, GDP would fall short of the 2.1% increase in the first quarter.

The headline number is probably going to be deceiving, however.

A surprising surge in the trade deficit is expected to subtract an unusually large 1.0 to 1.5 percentage points from GDP, masking the strength of the underlying economy.

Trade deficits are a negative for GDP, but they rarely have any immediate impact on ordinary consumers.

What's more important is the performance of the two main growth engines of the U.S. economy - consumer spending and business investment. Both are expected to show healthy increases in the second quarter.

Consumer spending, which accounts for about 70% of what goes on in the economy, is projected to rise 2%-plus, compared with a meager 0.5% increase in the first three months of the year. One tailwind: large tax refunds.

Typically, increases of 2% to 3% in consumer spending are normal when the economy is doing well.

Business investment, meanwhile, has been on a tear, largely due to massive spending on computer servers, memory and chips used to support artificial intelligence.

Purchases of new business equipment are expected to jump 15% for the second quarter in a row.

Sales have been spurred by "relentless business spending on high-tech goods associated with the AI buildout," said U.S. economist Grace Zwemmer of Oxford Economics.

An even deeper look under the hood could show the second quarter was stronger than that - no surprise given nicer weather and the start of the World Cup, which was co-hosted by the United States.

The best way to measure the actual performance of the economy is by focusing on what's known as final sales to private domestic buyers - that is, American businesses and the American people.

Final sales rose at a modest 1.7% annual pace in the first quarter, below the 2.5% average per quarter since 2022.

Look for these sales to top the 2% mark for the first time in three quarters. A 3%-plus increase would be especially good.

These sales are the most telling part of the GDP report because they factor out all the noise -trade deficits, inventory production and government spending.

All of these categories can distort or exaggerate GDP for reasons that have little to do with the health of the overall economy.

That's not to say they should be ignored, however.

The trade deficit, for instance, exploded in part because of intense demand for foreign computer chips and other AI-related products.

High demand for high tech has a downside, too. It has added upward pressure to U.S. inflation at a time when rising gas prices have boosted the cost of living.

Yet as second-quarter GDP is expected to show, the U.S. economy remains resilient in the face of an array of challenges that in the past might have severely stunted growth.

-Jeffry Bartash

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

07-29-26 1009ET