WASHINGTON, D.C.: The U.S. economy expanded at a slower pace in the second quarter as a wider trade deficit weighed on growth, though strong consumer spending and business investment tied to artificial intelligence infrastructure pointed to resilient domestic demand.

The Commerce Department said on July 30 that gross domestic product grew at an annualized rate of 1.5 percent in the April-June period, down from 2.1 percent in the first quarter and below economists' expectations of 2.1 percent.

The slowdown also reflected businesses drawing down inventories to meet strong demand, even as the economy appeared to weather the effects of the Middle East conflict during the quarter. Economists, however, warned that renewed hostilities involving the United States and Iran could pose risks to growth in the second half of the year.

"Underlying growth is solid, but unlikely to be sustained," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated sharply, rising at a 3.2 percent annualized rate after increasing just 0.5 percent in the first quarter.

The stronger spending was supported by generous tax refunds under President Donald Trump's "One Big Beautiful Bill" and by wealthier households benefiting from rising asset prices. Economists cautioned that those supports are fading, with savings at a four-year low and gasoline prices climbing again, leaving consumers with less room to maintain current spending levels.

Business investment also remained strong as companies continued spending heavily on AI infrastructure. Equipment investment rose at a 15.2 percent annualized pace, marking a second consecutive quarter of double-digit growth.

The AI investment boom, however, also drove imports higher, widening the trade deficit. Net trade reduced GDP growth by 1.01 percentage points, the biggest drag since the first quarter of 2025.

Inventories also weighed on growth, subtracting 0.67 percentage points as businesses continued to sell existing stock rather than rebuild inventories. Government spending declined at an annualized rate of 0.8 percent, with federal outlays falling 4.1 percent.

A key measure of underlying domestic demand, final sales to private domestic purchasers, increased at a 3.9 percent pace, the fastest since the first quarter of 2023.

The Federal Reserve on July 29 left its benchmark interest rate unchanged at a range of 3.50 percent to 3.75 percent, describing the economy as "expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East."

Inflation also accelerated during the quarter. The price index for gross domestic purchases rose at a 5.7 percent annualized rate, the fastest increase in four years. The Personal Consumption Expenditures price index, the Fed's preferred inflation measure, climbed 5.1 percent, while core PCE inflation, which excludes food and energy, increased at a 3.4 percent pace.

Although separate data showed inflation eased in June, economists said they expect price pressures to build again as tensions in the Middle East continue to affect energy costs.