GDP shows the economy grew 1.5% in the second quarter - but it's even better than it looks

By Jeffry Bartash

Consumer spending and business investment in AI drive the economy forward

Higher consumer spending gave a boost to the economy in the second quarter.

The U.S. economy sped up in the spring even as the Iran war dragged on, boosted by the twin engines of consumer spending and business investment.

The economy has show remarkable endurance in the past year despite a series of shocks such as tariffs, war with Iran, rising oil prices and stubborn inflation. Growth might not improve much, but a recession also seems far off.

Gross domestic product, the official report card of the economy, grew at a seemingly soft 1.5% annual rate in the second quarter that runs from April to June, the government said Thursday. GDP is adjusted for inflation.

The mediocre headline increase comes with a big caveat: A bigger U.S. trade deficit and smaller inventory replenishment shaved 1.7 percentage points off the economy's growth rate.

The economy would have shown a much healthier growth rate of 3%-plus if the trade deficit and inventories had had a neutral effect on GDP.

Categories like the trade deficit and inventories tend to distort GDP in the short run, but they don't have a huge impact on the overall economy.

Big picture: Can the economy keep it up?

Many analysts predict growth will slow a bit in the third quarter as the effects of large tax refunds fade. Higher gas prices and persistently high inflation are acting as headwinds and the Iran conflict still isn't over.

The Federal Reserve could also play a role. The Fed might raise interest rates in the fall to try to slow down inflation, an action that could further slow the economy.

All in all, though, the economy appears to be on a steady keel even with all the turbulence.

Market reaction: The Dow Jones Industrial Average DJIA and S&P 500 SPX were set to rebound in Thursday trading after sharp losses the day before. Stocks fell on Wednesday after the Fed voted to leave interest rates unchanged despite high inflation.

-Jeffry Bartash

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