US Economy Is Growing More Quickly than Washington Realized

The United States economy isn’t just not slowing down. It grew at a faster pace in the second quarter than previously thought, the Commerce Department said Thursday.

Two key forces were to thank: consumers, who spent more than original estimates, and businesses, which did the same. A corporate shopping spree on artificial intelligence, in particular, boosted the economy like ChatGPT boosts a lazy high-schooler’s take-home essay on Asimov’s I, Robot.

Shopping Spree

The year began with a 0.5% contraction in gross domestic product during the January-to-March quarter, marking the first decline in three years. The primary cause was businesses expediting efforts to beat new tariffs by front-loading imports, which are subtracted from the Commerce Department’s GDP calculations since the foreign production means there’s no US output.

The second quarter saw a healthy rebound, with GDP rising at a 3.3% annualized rate in the April-to-June period, according to the Commerce Department’s update. That’s notable because its initial estimate of 3% issued last month fell narrowly short of the 3.1% expected by economists. And especially crucial is what pushed up the revised figure. First, there’s an important economic term to put in your noggin: real final sales to private domestic purchasers: 

• This very useful figure, one Federal Reserve officials keep a close eye on, measures the sales of domestically produced goods and services that are consumed by domestic households and businesses. In other words, it zeroes in on core demand and strips out trade distortions, which is very helpful for measuring the economy amid tariff turbulence: It rose 1.9% in the second quarter, significantly better than the previous estimate of 1.2%.
• The improved GDP estimate was also impacted by a massive upward revision in business spending on intellectual property products, a category that includes software and technology research and development. Spending is now believed to have increased at a 12.8% annualized rate, twice the 6.4% initial estimate and the most in four years, reflecting the massive spending on artificial intelligence.

UBS estimates companies will spend $375 billion on AI infrastructure this year and $500 billion next year.

Unconvinced: “The economy temporarily rebounded in the second quarter as businesses imported less in the second quarter than they did in the first,” LPL Financial analysts wrote earlier this month. “But this should not be construed as an improvement in underlying economic momentum.” The Commerce Department’s revised figures Thursday showed consumer spending up 1.6%, better than the previous 1.4% estimate. LPL analysts added they expect consumer spending to moderate in future quarters, noting rising delinquencies among higher-income consumers — the upside being this could “alleviate inflation pressure (further supporting Fed rate cuts).”