U.S. Economy Expands 1.5% in Q2 Amid Rising Energy Prices and Trade Deficits

The U.S. economy recorded a 1.5% increase in real GDP on a quarter-over-quarter seasonally adjusted annual rate (q/q saar) basis in the second quarter of 2024, according to the Bureau of Economic Analysis (BEA) Advance release. This growth followed a stronger 2.1% expansion in the first quarter but fell short of the 2.3% gain forecasted by the Action Economics Forecast Survey. On a year-over-year basis, GDP rose 2.1%.

The moderation in GDP growth during Q2 was primarily attributable to substantial drags from trade and inventory investment. Imports surged 11.5% quarterly, significantly widening the trade deficit and subtracting one percentage point from overall GDP growth. Inventory investment declined by $50.8 billion (in 2017 dollars), marking the fifth consecutive quarter of inventory reductions — an unusual pattern outside of recessionary periods — and subtracting 0.7 percentage points from growth.

Despite these headwinds, personal consumption expenditures (PCE) and business spending on equipment and intellectual property provided robust support to GDP. PCE grew 3.2% q/q saar in Q2, contributing 2.1 percentage points to GDP growth, rebounding sharply from a modest 0.5% increase in Q1. This rebound was driven by a 5.2% jump in goods consumption, including a 6.8% rise in durable goods and a 4.4% increase in nondurables. Spending on services also rose a solid 2.2%. Analysts attribute part of the PCE rebound to larger-than-normal income tax refunds received during the quarter.

Business investment remained a key growth driver, with equipment spending posting a second consecutive double-digit increase of 15.2% in Q2, following a 15.8% gain in Q1. Intellectual property investment also grew strongly by 8.8%, though this was a slowdown from the 13.8% surge in Q1, largely due to reduced software spending. Together, these investments added 1.3 percentage points to GDP growth.

Residential construction contributed marginally to growth, rising 1.5% q/q and adding 0.1 percentage points to GDP — its first quarterly gain in six quarters.

Conversely, business construction spending declined 5.0% in Q2, marking its tenth consecutive quarterly drop and subtracting 0.1 percentage points from GDP. While data center construction remained vigorous, softness in office and manufacturing facility construction outweighed gains in this newer segment.

Total government spending fell 0.8% q/q after a 4.4% rebound in Q1, subtracting 0.1 percentage points from GDP growth. The decline was driven by a 12.8% slump in federal nondefense spending. However, federal defense spending increased 2.4%, and state and local government spending rose 1.1%. Given escalating tensions in the Middle East, federal defense spending is expected to increase further in upcoming quarters.

Domestic demand, excluding the effects of inventories and net exports, showed strong momentum. Real final sales to domestic purchasers grew 3.1% q/q saar in Q2, well above trend and up from 2.2% in Q1. Real final sales to private domestic purchasers — the Federal Reserve’s preferred measure — surged 3.9% q/q, the largest quarterly gain since Q1 2023, and were up 2.6% year-over-year.

Inflationary pressures intensified notably in Q2, reflecting an 87% annualized surge in energy prices following the escalation of the US-Iran conflict in early March. The GDP price index jumped 6.2% q/q saar, up from 3.6% in Q1. Similarly, the PCE price index rose 5.1% in Q2 compared to 4.6% in Q1. Core inflation measures, which exclude food and energy, showed a mixed picture: the core GDP price index increased 4.4% in Q2 (up from 3.2% in Q1), while core PCE inflation slowed to 3.4% from 4.4%.

The detailed GDP data are accessible through Haver Analytics’ USECON and USNA databases, with the latter containing comprehensive BEA national accounts data. Consensus forecasts from Action Economics are available in the AS1REPNA database.

Sandy Batten, the author of this analysis, brings over 30 years of experience in economic and financial market analysis. Her extensive background spans senior roles in financial institutions, government agencies, and academia. She has been recognized as the most accurate U.S. forecaster by the National Association for Business Economics and holds advanced degrees in economics from The Ohio State University.