Kiplinger’s Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or to subscribe for the latest trends and forecasts from our highly experienced Kiplinger Letter team.
The slowdown in the economy’s growth in the second quarter, to 1.5% from 2.1% in the prior quarter, is a bit misleading. Consumer and business spending remained strong, with consumption up 3.2% and business equipment spending up 15.2%, the latter mostly the result of heavy spending on computer chips in the artificial intelligence race. Despite flat government spending, final sales to domestic purchasers rose a strong 3.9%. This measure is often used to track underlying spending momentum by excluding foreign trade and inventory movements. And that is where the moderation in second-quarter GDP growth came from. Import growth (11.5%) outstripped export growth (4.5%). The drop in the value of inventories pulled nearly a full percentage point of GDP growth from the second quarter. But much of this drop was the result of a decline in petroleum stockpiles, as U.S. exports of petroleum increased sharply while imports of petroleum decreased.
There are a few continued areas of weakness in spending, however. Nonresidential construction declined for the 10th consecutive quarter. Federal government spending excluding defense took another big hit. Housing construction rose a paltry 1.5%, though this was actually good news after five quarters of contraction.
Expect moderate 2% GDP growth to continue into 2027. (Growth of 2% should become roughly the norm from now on, since it represents the sum of productivity gains and labor force growth, which determine long-run economic growth potential.) The main threats to growth at the moment are that consumers’ low savings rate may cause them to slow their spending in the future, and that continued war with Iran may stoke inflation by allowing higher energy price increases to bleed into the rest of the economy. In such an event, the Federal Reserve would likely feel the need to raise interest rates in order to control inflation by slowing the economy. Finally, much of the heavy business spending on computer equipment and semiconductors is going to imports, which doesn’t help U.S. economic growth.
The Trump administration is continuing to impose new tariffs, but these will have little net effect on GDP growth going forward, since they mostly replace previous tariffs that expired or were invalidated by the Supreme Court. Importers are starting to receive refunds of tariffs paid under the invalidated tariff regime.
Government spending will continue to contribute little to growth. Federal defense spending to replace ammunition stocks has yet to ramp up, and nondefense spending will likely continue to be flat or to decrease.
Source: Department of Commerce: GDP Data
