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Some folks have gotten a bit carried away with the revisions that put the second quarter growth rate at 3.8 percent. That does look impressive in isolation, but it is important to remember the economy shrank at a 0.6 percent rate in the first quarter. 

That puts the average at 1.6 percent for the first half of the year. That’s not terrible but it is hardly cause for celebration. Remember, the economy grew 2.4 percent last year and the vast majority of forecasters expected growth at this rate to continue. 

And we really do need to look at the two quarters together. Just as unusual factors were responsible for the fall in GDP we saw in the first quarter, they are also responsible for the strong growth reported for the second quarter. 

To take the most notable example, the lower trade deficit added 4.83 percentage points (PP) to growth in the second quarter. A pre-tariff surge in the trade deficit subtracted 4.63 PP from growth in the first quarter. Only a devoted Trumper would focus on the second quarter number without mentioning the first quarter jump in the trade deficit.

Moving beyond the irregular numbers, we get that non-residential fixed investment added 0.98 PP to growth in the second quarter after adding 1.24 PP in the first quarter. The first quarter growth was partly due to pre-tariff stockpiling but the second quarter growth on top of this indicates we are looking at something sort of real. This is the AI boom. If that turns into a bust, we will see this growth quickly reversed.

Consumption accounts for the bulk of GDP and here the story is pretty blah. The second quarter’s growth rate was a healthy 2.5 percent, accounting for 1.68 PP of the quarter’s growth. But this followed a growth rate of just 0.6 percent in the first quarter, leaving an average of rate of 1.6 percent for the first half. That’s not horrible, but certainly not great.

We also have seen evidence that the growth in consumption has been concentrated among higher income people who are spending their stock gains. That is consistent with my simple measure of looking at real spending at fast food restaurants. I consider this useful since it’s unlikely that rich people increase their consumption of fast food because their stock portfolio is worth more. 

And spending on fast food has to rank as largely a discretionary purchase. It is one thing that is relatively easy to cut back on if a family has to tighten its belts. Real spending at fast food restaurants was just 0.3 percent higher in the second quarter than the average for 2024. That doesn’t look like most people are feeling good about the economy.

Tomorrow, we will get new data on consumption for August, along with revisions for prior months’ data. Maybe that will show a different story, but for now, it looks like we have a weak economy that is being sustained by the AI boom. That boom could go on for a while and keep the economy moving forward, but it may not.  

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