2Q GDP and June PCE: Stronger demand and the start of disinflation

Research evidence excerpt

2Q GDP and June PCE: Stronger demand and the start of disinflation

UpdateM

2Q GDP: Much stronger than the 1.5% headline

Real GDP rose at a 1.5% annual rate in 1Q versus consensus 2.0% and our 1.1% forecast.

The report was much stronger than the 1.5% headline would suggest. Private domestic

demand rose at a 3.9% pace. Consumption, +3.2%, rebounded more strongly than we

expected from Q1 softness. Equipment investment +15% for a second straight quarter,

underlined the continuing strength in capex.

The boost to GDP from AI-related capex accelerated sharply to 0.8 pct pt in 2Q from a

recent pace of about 0.23 pct pt. Imports of AI related goods actually fell in 2Q, for the

first time in more than a year. Software and IT equipment each contributed 0.2-0.3 pct pt.

There was also some broadening in equipment investment (details below).

The elements that held back headline GDP are likely to reverse. Sales from the Strategic

Petroleum Reserve lowered Federal government spending and subtracted ¼ point from

GDP—those will eventually reverse as the SPR is refilled. Private inventories subtracted

0.7 pct pt from GDP and will have to be rebuilt. Trade was again a large drag; we doubt

that'll continue in H2.

But the fundamental strength in private domestic demand (consumption plus investment)

gives a stronger tone to this report than the 1.5% headline (or even the 2% consensus

estimate) would suggest.

Exhibit 1: 2Q GDP

4Q/4Q % change Quarterly % change, annual rate (unless otherwise noted)

2024 2025 2Q25 3Q25 4Q25 1Q26 2Q26 Projected Revision

Real GDP 2.4 2.0 3.8 4.4 0.5 2.1 1.5 1.1 0.4

Final Sales 1 2.6 2.2 7.5 4.5 0.3 1.9 2.2 1.1 1.1

Final Domestic Demand 2 3.0 1.8 2.4 2.8 0.6 2.2 3.1 2.1 1.0

Final Private Domestic Demand 3 2.9 2.4 2.9 2.9 1.8 1.7 3.9 2.7 1.2