US GDP (Q2 2026 – second estimate)

The economy that could have been

The US economy remains on solid footing, but the expansion is resting on a narrower foundation. Consumer spending remained solid in the second quarter, though momentum appears to be slowing as of mid-summer. At the same time, robust AI-related investment continues to support activity, helping offset persistent cost pressures and a softer labor market. Household balance sheets remain broadly healthy, while corporate balance sheets are solid and profit margins have reached an all-time high. Still, income erosion is increasingly visible among lower- to upper-middle-income households, as well as smaller firms operating outside the AI investment orbit.

Real GDP advanced 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. Net trade was a notable drag, subtracting 1.0ppt from GDP growth, as imports continued to surge amid strong demand for technology equipment and ongoing efforts by businesses to adapt to a shifting tariff landscape.

Looking across other gauges of activity, this continues to feel like the economy that could have been. Rather than growing at a 3%+ pace, the US economy remains constrained to around 2% growth amid layered negative supply shocks, many of them policy-driven. Real gross domestic income rose 2.1% year over year (y/y), matching real GDP growth. Absent the strains from the global trade conflict, tensions in the Middle East and persistent policy uncertainty, the AI-investment surge could well have supported steady growth above 3%.

Looking ahead, we continue to expect the economy to advance at a steady, if unremarkable, 2% pace. Modest real income growth should cap consumer spending momentum, even as stock market wealth effects provide a meaningful tailwind for higher-income households. Business investment and hiring are likely to remain selective and targeted, with an outsized focus on AI-related capital spending.

In the details:

• Real final sales to private domestic purchasers – GDP excluding trade, inventories and government spending – advanced a very robust 4.2% annualized and 2.7% y/y. This points to private sector resilience even if growth is concentrated among a few sectors and segments of the economy.
  
  
• Real consumer spending growth advanced a solid 3.4%, supported by affluent households’ spending on services, and healthy gains on spending for durable and nondurables goods. The surge in durable goods outlays was revised marginally lower to 5.7%, driven by autos and furniture and furnishing. With consumers pulling back in July, this surge will be partially reversed in H2 2026. Nondurable outlays growth was also revised marginally lower to 3.5%, led by spending on clothing while spending on gas plunged on surging prices. Outlays on services advanced a robust 3.1%, led by recreation (up 6.8%) and food services and accommodation (up 4.6%).  
  
  
• Business investment growth was revised up to 8.5% despite a 1.8% decline in structure investment. Equipment spending surged 13.6%, led by a 27.8% surge in industrial equipment and 27.1% surge in 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 1.2% in Q2. 
  
  
• Government spending fell 1.0%, subtracting 0.2ppt from real GDP growth with federal outlays contracting 4.2% in Q2 as the 2.4% advance in defense spending was not enough to offset the 13.1% contraction in nondefense spending. 
  
  
• Net trade subtracted 1.1ppt from growth as imports (+12.5%) grew faster than exports (+4.5%). 
  
  
• Corporate profits (with inventory valuation and capital consumption adjustments) surged $400.9 billion in Q2 with domestic financial profits rising $72 billion, domestic nonfinancial profits surging $310 billion and rest-of-the-world profits rising $20 billion. Profit margins surged 1.0ppt to 14.9% of GDP – reaching a new all-time high.

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.