US economic growth sees surprise slowdown in second quarter

There was a surprise slowdown in US economic growth in the three months to June despite an increase in consumer spending, according to official figures.

The Commerce Department said the US economy grew at an annual rate of 1.5% in the second quarter, down from 2.1% seen in the first three months of the year. Analysts had forecast growth to remain around 2%.

It comes as the world's largest economy continues to weather the financial impact of the war with Iran and US businesses navigate tariffs.

The second quarter downturn was due to lower government spending, investment and exports, which offset the boost in consumer spending.

Consumer spending, which accounts for more than two-thirds of economic activity in the US, grew at a rate of 3.2% last quarter after slowing to 0.5% earlier this year.

Despite prices rising at 3.5% in the year to June, Americans continued to spend on motor vehicles - particularly light-duty trucks - furniture and prescription drugs, according to surveys.

Michael Pearce, chief US economist at Oxford Economics, said the growth slowdown underplayed the "strength" of the US economy and suggested the pace would return to above 2% later this year.

He said there were signs that investment in industries away from the AI boom was "reviving".

Pearce added that "surging AI-related investment is still the biggest game in town", but said the rise in imports of microchips used in its development mean its contribution to growth remained "modest".

The Federal Reserve decided to hold interest rates for a fifth time in a row in Wednesday, with new chairman Kevin Warsh warning there was no "magic wand" to tackle rising prices.

Prices in the US have been rising at a rate above the Fed's 2% target for more than five years, but the Commerce Department said consumer spending remained resilient.

The Fed said US economic activity was expanding at a "solid pace despite uncertainty caused by the conflict in the Middle East".

The main economic concern from the conflict has been rising oil prices, which have surged again following recent escalations.

Brent crude, the global benchmark for oil prices, was about $90 a barrel on Thursday. Higher oil prices typically lead to increased prices at the pumps, with average gasoline prices now back above $4 a gallon.

But Bradley Saunders, North America economist for Capital Economics, said while growth had slowed in recent months, the figure "seriously undersells a healthy economy".

He said the statistics showed households had "shrugged off" the hit to budgets from higher fuel prices.

Separate data on the cost living was also released on Thursday. The Personal Consumption Expenditures Price Index, a measure of inflation closely watched by the Federal Reserve, increased by 3.7%.