Why the U.S. Economy Slowed in the Second Quarter

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Alex Ossola (0:34)

US economic growth slowed in the second quarter, but there were some positive signs in the details of the report. We'll dig in. Plus, the Buzzy Hedge Fund's situational awareness sold off most of its stock portfolio after big losses on AI.

Gregory Zuckerman (0:47)

Leo Aschenbrenner flew a little high in the sky, close to the sun, and it kind of burns him a little bit.

Alex Ossola (0:54)

And markets rally after yesterday's punishing session with Microsoft adding its biggest percentage gain in almost two decades. It's Thursday, July 30th. I'm Alex Ossola for the Wall Street Journal. This is the PM Edition of What's News, the top headlines and business stories that move the world today.

US economic growth slowed in the second quarter. The Commerce Department said today that US. GDP, that is the value of all goods and services produced here, rose at an annual one and a half percent rate. That's slower than economists had expected and slower than the previous quarter.

WSJ economics reporter Harriet Torry is here to discuss. Harriet, one of the things that dragged on GDP for the last quarter was actually something that's propelled stock markets, the AI boom. Could you explain what's going on there?

Harriet Torry (1:44)

We've seen very, very strong investment in artificial intelligence. That, of course, is generally a positive thing for the economy. The fact that these data centers are being built, that's all generating economic activity. But the other side of the coin is that many of these components that are used in artificial intelligence, things like semiconductors, are imported from overseas. Imports are technically counted as a subtraction when you do the calculation of GDP.

That ends up making the headline GDP number look a little soft. But when you look a bit under the hood, there's a measure called final sales to private domestic purchases, which is just a measure of consumer spending and business investment. And that rose at a 3.9% rate in the second quarter, which is very strong. And those are definitely good signs for future growth.

Alex Ossola (2:28)

Yeah, I wanted to ask you about consumer spending. What was driving that? I mean, is it just because gas prices rose?

Harriet Torry (2:35)

We did have this gas price shock that continued in the second quarter. That is definitely not great for households. But at the same time, they seem to largely shrug it off. And we saw that consumer spending was really very strong.

Alex Ossola (2:46)

Also out today are the latest numbers for the Fed's preferred measure of inflation, that's known as the Personal Consumption Expenditure Price Index. It fell by 0.1% last month, but it's still pretty high at 3.7%, certainly above the 2% of the Fed's target rate. Yesterday, of course, the Fed held rates steady. But what do these latest numbers suggest officials might do at the next meeting in September?

Harriet Torry (3:09)

We did see a slight cooling off of inflation in June according to PCE. But at the same time, demand appears to be strong in the economy, and that is potentially a sign that inflation could continue to spread out, that it might not be limited to just this oil price shot related to the conflict in Iran.

Alex Ossola (3:25)

That was WSJ reporter, Harriet Torry. Thank you, Harriet.

Harriet Torry (3:28)

Thanks.

Alex Ossola (3:32)

There was a huge run up in stocks today after their big tumble yesterday. The NASDAQ closed up almost 3% higher with a rally in chip stocks and Microsoft's best market day since 2008 after yesterday's earnings. It closed up 16 percent. The Dow and the S&P also climbed and both finished up more than 1 percent. Meanwhile, treasury yields are at multi-year highs because of worries about rising inflation. That pushes up borrowing costs, which affects all kinds of economic activity, but in particular, the housing market. Mortgage rates this week jumped to their highest level in a year, averaging 6.66 percent for a 30-year loan. Mortgage rates are closely tied to the 10-year treasury.

But back to stocks, today, two companies went public that you might be familiar with. One is Reformation, the cool girl clothing brand. Not saying I'm cool, but I have bought a few dresses there. Anyway, its IPO valued the company at about $886 million, and its shares closed up half a percent on its first day of trading. The other is the Jersey Mike's sandwich chain.