But soaring imports (data-center components), a drop in federal government spending, and changes in private inventories ate into GDP growth.

By Wolf Richter for WOLF STREET.

Two major things stood out in the GDP arena in Q2:

1. Red-hot inflation. The GDP deflator, which tracks inflation in the entire economy (consumers, businesses, and governments) soared by 6.3% in Q2 annualized. Not adjusted for this red-hot inflation, “current dollar GDP” jumped by 7.9%. But adjusted for inflation, “real GDP” rose by only 1.5%, according to the GDP data from the Bureau of Economic Analysis today.

2. Strong domestic private-sector demand. “Real Final Sales to Private Domestic Purchasers” grew by an annual rate of 3.9%, adjusted for this red-hot inflation, the strongest growth since Q1 2023, driven by strong growth in consumer spending (+3.2%) and private fixed investment (+7.0%), all adjusted for inflation.

“Real Final Sales to Private Domestic Purchasers” = “real GDP” without government, without imports and exports, without change in inventories. It reflects private-sector domestic demand and covers 88% of overall GDP (blue columns, left scale: % change; red line, right scale: trillion $; all annualized, inflation adjusted):

“Real” GDP overall grew by only 1.5%, dragged down by this red-hot 6.3% inflation, a massive surge in imports (deducted from GDP) in part due to high-dollar AI data-center related equipment; a drop in federal government consumption expenditures and gross investment; and the change in private inventories.

In the years between the Great Recession and the pandemic (so excluding recessions), average quarter-to-quarter GDP growth was 2.5% annual rate. The average 20-year quarter-to-quarter GDP growth, including recessions, was 2.2% annual rate.

“Current-dollar GDP” (not adjusted for inflation) grew by 7.9% to $32.5 trillion, all annual rates.

This “nominal GDP” of $32.5 trillion represents the actual size of the US economy in today’s dollars and forms the basis for the Debt-to-GDP ratio (see chart at the bottom) and similar GDP-based ratios.

The difference between this growth rate of 7.9% in current dollars, and the growth rate of “real” GDP of 1.5% was the above mentioned red-hot 6.3% inflation in Q2 GDP.

Consumer spending rose by an annual rate of 3.2% in Q2, adjusted for inflation. Consumer spending accounted for 69% of the US economy.

This growth rate added 2.1 percentage points to the GDP growth of 1.5%.

The spending growth was spread over goods and services. But consumers really splurged on durable goods (motor vehicles, computers, smartphones, appliances, bicycles, etc.). All these figures are adjusted for price changes (inflation):

• Services: +2.2%.
• Durable goods: +6.8%
• Nondurable goods: +4.4%.

The blue columns show the growth rates (left axis), the red line shows the dollars (right axis), all in seasonally adjusted annual rates (SAAR):

Private fixed investment (excludes changes in inventory) jumped by 7.0% annualized and adjusted for inflation. Of which:

• Nonresidential fixed investments: +8.4%:
  • Structures: -5.0%
  • Equipment: +15.2%.
  • Intellectual property products (software, movies, etc.): +8.8%.
• Residential fixed investment: +1.5% (first growth after 5 quarters in a row of declines).

Private fixed investment accounted for 18% of the US economy and contributed 1.2 percentage points to the 1.5% GDP growth.

Government consumption expenditures and gross investment declined by 0.8% annualized, adjusted for inflation, all of the decline due to a decline in federal nondefense spending.

Note: This measure, “government consumption expenditures and gross investment,” does not include interest payments (generally, neither interest payments nor interest income are included in GDP). And it does not include transfer payments made directly to consumers (the biggest part of which are Social Security payments), which are counted in GDP when consumers and businesses spend these funds or invest them in fixed investments.

Federal government spending fell by 4.1% annualized in Q2, after the 4.4% surge in Q1 when government spending filled the holes left behind by the shutdown last fall:

• National defense: +2.4%
• Nondefense: -12.9% after the 20.7% surge in Q1

The decline in federal government spending subtracted 0.26 percentage points from the 1.5% GDP growth.

State and local government spending rose by 1.1%, which added 0.12 percentage points to GDP growth.

Combined, federal, state, and local government consumption and investment accounted for 17% of the US economy. About 60% of this measure of government spending is from state and local governments. Federal government spending accounts for about 40%.

Trade Deficit worsens on surging imports.

Imports jumped by an annual rate of 11.5%, adjusted for price changes, on a surge of imports of electronic products, including semiconductors as part of the AI data center boom.

Imports are a negative in GDP, and this surge of imports deducted 1.51 percentage points from the 1.5% GDP growth.

• Imports of goods: +14.7%
• Imports of services: +0.1% (includes US tourists spending overseas).

Exports rose by 4.5%. Exports are a positive in GDP and contributed 0.50 percentage points to the 1.5% GDP growth.

• Exports of goods: +8.9%.
• Exports of services: -3.3% (includes foreign tourists spending in the US).

“Net exports” (exports minus imports) worsened to an inflation-adjusted trade deficit of $1.08 trillion.

The Government’s Treasury Debt-to-GDP ratio ticked down to 121.5%, as current-dollar GDP rose 1.9% quarter-to-quarter not annualized to $32.5 trillion, while the Treasury debt rose 1.0% quarter-to-quarter to $39.5 trillion.

In other words, in Q2, the economy grew faster than the debt, and the Debt-to-GDP Ratio dipped a little – that’s the concept of controlling the debt fiasco via “letting it run hot,” meaning higher inflation and higher nominal economic growth brings down the burden of the debt.

But beyond the quarter-to-quarter squiggles, the trend is still higher.

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