The US economy experienced an unexpected slowdown during the three months ending in June, despite a notable increase in consumer spending, according to newly released official data.
Figures published by the US Commerce Department showed that the world’s largest economy expanded at an annualised rate of 1.5% during the second quarter. The growth rate was lower than the 2.1% recorded in the first three months of the year and also fell short of analysts’ expectations, which had projected economic growth to remain close to 2%.
The weaker-than-expected performance comes as the United States continues to deal with the economic consequences of the war with Iran, while American companies are also adjusting to the effects of tariffs and ongoing uncertainty surrounding international trade.
The slowdown in economic growth during the second quarter was largely driven by declines in government spending, business investment and exports. These factors weighed on overall economic activity and offset the significant boost provided by stronger consumer spending.
Consumer spending, which represents more than two-thirds of all economic activity in the United States, increased at an annualised rate of 3.2% during the second quarter. This marked a substantial improvement from the first three months of the year, when consumer spending growth had slowed sharply to just 0.5%.
Despite continued pressure from rising prices, American consumers remained willing to spend on a range of products and services. Inflation rose by 3.5% in the year to June, but surveys indicated that households continued purchasing motor vehicles, particularly light-duty trucks, as well as furniture and prescription medicines.
Michael Pearce, chief US economist at Oxford Economics, said the latest growth figures did not fully reflect the underlying strength and resilience of the American economy.
Pearce argued that the slowdown should not be viewed as a sign of major economic weakness and predicted that the pace of growth could recover to above 2% later this year.
He said there were increasing signs that investment was beginning to recover in industries outside the rapidly expanding artificial intelligence sector. Although AI-related investment remained a major driver of economic activity, Pearce said broader investment across other parts of the economy appeared to be gaining momentum.
“Surging AI-related investment is still the biggest game in town,” Pearce said. However, he added that the growing volume of imported microchips required to support AI development meant that the sector’s direct contribution to overall US economic growth remained relatively modest.
The latest economic figures were released after the Federal Reserve decided on Wednesday to leave interest rates unchanged for the fifth consecutive meeting.
New Federal Reserve chairman Kevin Warsh warned that policymakers did not have a “magic wand” capable of quickly addressing the continued rise in prices. The central bank has faced persistent challenges in bringing inflation back under control while maintaining stable economic growth.
Inflation in the United States has remained above the Federal Reserve’s official 2% target for more than five years. Nevertheless, the latest Commerce Department data indicated that consumer spending continued to show resilience despite the prolonged period of elevated prices.
The Federal Reserve said the US economy was continuing to expand at a “solid pace”, although it acknowledged that the conflict in the Middle East had created additional uncertainty for businesses, consumers and financial markets.
One of the main economic concerns linked to the conflict has been the continued rise in global oil prices. Crude oil prices have increased again following recent developments and renewed tensions in the region.
Brent crude, the international benchmark used to measure global oil prices, was trading at approximately $90 per barrel on Thursday. Rising oil prices generally result in higher fuel costs for consumers and can place additional pressure on household budgets by increasing transportation and energy expenses.
Average gasoline prices in the United States have now risen above $4 per gallon again, increasing the cost of fuel for motorists and adding to broader concerns about the impact of inflation.
However, Bradley Saunders, North America economist at Capital Economics, said the latest economic growth figure did not provide a complete picture of the country’s underlying economic strength.
Although he acknowledged that economic growth had weakened in recent months, Saunders said the 1.5% figure “seriously undersells a healthy economy”.
He said the data showed that American households had largely “shrugged off” the impact of higher fuel prices and continued spending despite the increased pressure on their budgets.
Separate data focusing on the rising cost of living was also published on Thursday. The Personal Consumption Expenditures Price Index, which is closely monitored by the Federal Reserve when making decisions on interest rates and inflation policy, increased by 3.7%.
The latest figures highlight the mixed outlook facing the US economy. While overall economic growth slowed more than expected, strong consumer spending and continued household demand provided support. At the same time, falling government spending, weaker investment, lower exports, elevated inflation, higher energy costs and uncertainty linked to the conflict in the Middle East continue to create challenges for the country’s economic outlook.
