US GDP (Q2 2026 – first estimate)

Solid, but concentrated growth

Real GDP grew at a modest 1.5% annualized rate in Q2 2026, following a moderate 2.1% increase in Q1. Real final sales rose 2.2%, while inventories subtracted 0.7 percentage points (ppt) from growth. The main engines of activity were resilient and broadening consumer spending and surging investment in business information processing equipment and intellectual property products linked to AI. Net international trade was a notable drag, subtracting 1.0ppt from growth, as imports remained strong amid rising demand for technology equipment and continued efforts by businesses to adapt their supply chains to a more permanent tariff landscape.

Looking beneath headline GDP, real final sales to private domestic purchasers — GDP excluding trade, inventories and government spending — advanced a very robust 3.9% annualized and 2.6% year over year. These are undoubtedly encouraging figures, but they also underscore two vulnerabilities. Growth remains concentrated in a relatively narrow set of sectors, while elevated inflation and interest rates are likely to erode growth momentum.

Overall, as we enter the second half of the year, the US economy continues to advance at a moderate pace. Consumers are still spending, even as some households have become more cautious and frugal amid an ongoing income squeeze. Retailers are reporting greater price sensitivity while facing higher input costs stemming from tariffs and renewed Middle East tensions, putting additional pressure on margins.

Business investment remains robust, led by the ongoing AI investment surge and associated spending on technology equipment, software, energy and digital infrastructure. Meanwhile, trade flows continue to swing widely, with businesses reporting considerable uncertainty surrounding the United States-Mexico-Canada Agreement (USMCA) negotiations and the transition from temporary Section 122 measures toward more permanent Section 301 tariffs.

Looking ahead, we continue to expect moderate consumer spending growth and AI-led business investment to support real GDP growth into 2027. The most immediate downside risk remains a prolonged escalation of the Middle East conflict that lifts inflation and long-term interest rates and pushes the Federal Reserve toward renewed policy tightening. The resulting tightening in financial conditions would weigh on consumer demand and private-sector investment.

Given the economy’s stronger-than-expected start to 2026, we have raised our real GDP growth forecast to 2.1% this year and continue to expect growth of 2.0% in 2027.

In the details:

• Real consumer spending growth advanced a solid 3.2% supported by affluent households’ spending on services and healthy gains in durable and nondurable goods spending. The 6.9% surge in durable goods outlays was driven by autos and furniture and furnishings, and it is unlikely to repeat in H2. Nondurable outlays grew 4.4%, led by a 4.4% gain in clothing while spending on gas plunged 4.9% on surging prices. Spending on services advanced a moderate 2.2% led by recreation (up 4.7%) and food services and accommodation (up 4.5%).  
  
  
• Business investment grew a solid 8.4% despite a 5% decline in structure investment. Equipment spending surged 15.2%, led by a 29% surge in both industrial equipment and transportation equipment, while information processing equipment rose 8.3%. Intellectual property products investment advanced 8.8%, reflecting continued strength in AI-driven capital spending. 
  
  
• Residential investment rose for the first time since Q4 2024, up a modest 1.5% in Q2. 
  
  
• Government spending subtracted 0.1ppt from real GDP growth with federal outlays contracting 4.1% in Q2 as the 2.4% advance in defense spending was not enough to offset the 4.1% contraction in nondefense spending. 
  
  
• Net trade subtracted 1.0ppt from growth as imports (+11.5%) grew faster than exports (+4.5%). 
  
  
• Headline personal consumption expenditures (PCE) inflation accelerated in Q2. On an annualized basis, headline PCE rose 5.1%, its strongest quarterly increase since 2022, while core PCE increased 3.4%. As a result, year-over-year headline and core inflation rose to 3.8% and 3.3%, respectively.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.