US economy grows 1.5% in Q2, misses estimates as higher oil prices weigh on growth

The US economy expanded at a slower-than-expected pace in the second quarter, reflecting the impact of higher energy prices and weaker government spending, even as consumer spending and business investment remained resilient.

According to data released by the Commerce Department on Thursday, the world's largest economy grew at an annualised rate of 1.5% between April and June. The reading was below the 2.1% growth forecast by economists polled by Reuters and slower than the 2.1% pace recorded in the first quarter.

The weaker growth comes as the US economy continues to deal with the fallout from the conflict in West Asia, which disrupted shipping through the Strait of Hormuz and pushed up global oil prices. Higher crude prices translated into a sharp increase in US fuel costs, raising inflationary pressures during the quarter.

Despite the slowdown, consumer spending remained a bright spot. Household spending, which accounts for more than two-thirds of the US economy, increased at an annualised rate of 3.2%, accelerating from 0.5% in the first quarter. Consumers continued to spend on both goods and services despite paying more for fuel.

The Commerce Department said strong consumer demand helped cushion the economy against the drag from higher imports and lower government spending.

Business investment also remained healthy as companies continued spending on artificial intelligence infrastructure, including information technology equipment and software. The ongoing AI boom has boosted demand for imported semiconductor chips and other technology products.

However, those imports also weighed on the GDP calculation because imported goods are not counted as domestic production. Economists said rising imports linked to data centre construction and AI investments partly offset the gains from stronger domestic demand.

The GDP report was released a day after the Federal Reserve kept its benchmark interest rate unchanged at 3.5% to 3.75%. Policymakers opted to leave rates steady as they assess the impact of higher inflation and geopolitical tensions on the economy.

Fed Chair Kevin Warsh described the economy as resilient, pointing to continued strength in productivity, investment and the labour market. He said AI-related investment remains a key driver of economic activity.

Looking ahead, economists say energy prices remain one of the biggest risks to the US economy. A sustained increase in oil and gasoline prices could keep inflation elevated and complicate the Federal Reserve's policy decisions in the coming months.