MICHEL MARTIN, HOST:
A new report from the Commerce Department suggests the economy has largely weathered the shock of higher energy prices caused by the war with Iran.
LEILA FADEL, HOST:
The U.S.'s gross domestic product grew at an annual pace of 1.5% during the spring quarter. That is slower growth than the economy saw earlier in the year.
MARTIN: NPR's Scott Horsley is on the line with us now. Good morning, Scott, to you.
SCOTT HORSLEY, BYLINE: Good morning, Michel.
MARTIN: So what's driving this economic growth?
HORSLEY: As usual, consumer spending is the biggest engine in this economy. And Americans continued to spend pretty freely during the spring, even as gasoline prices were soaring. We also continued to see a lot of investment by big tech companies on data centers to power the artificial intelligence boom. Kathy Bostjancic is chief economist at the insurance and financial services company Nationwide. She says those are the pillars that are really propping up the economy at a time when we're seeing slower growth in other areas like exports or housing.
KATHY BOSTJANCIC: I'd say the U.S. economy's quite resilient and strong, but it's not balanced growth. It's really heavily reliant on consumer spending and AI investment, and you'd like to see a broadening-out of activity across different sectors.
HORSLEY: The GDP number would have looked better had it not been for a big jump in imports during the spring after President Trump's emergency tariffs were struck down by the Supreme Court. A lot of importers may have seen a window after that to bring in cargo. Remember, the D in GDP stands for domestic, so imports are a subtraction from that.
MARTIN: How much is inflation weighing on that economic growth?
HORSLEY: It's not helping. You know, if consumers have to pay more for every gallon of gas, that leaves less money in their pockets to spend on everything else. And that's especially true for lower-income households. The war with Iran has caused higher inflation on average, and people's wages are not keeping up with those higher prices. So far, that has not forced most people to cut back on spending. But Bostjancic says it has pushed them to dip into savings or put more of their spending on their credit card.
BOSTJANCIC: Now, there's some limit to the degree they can do that. But I think for a short period of time, probably continue to see the consumer spending at a - at at least a solid piece in the third quarter.
HORSLEY: Some analysts say a lot of today's spending growth has been driven by upper-income families who are feeling pretty wealthy thanks to the booming stock market and rising home values. If there were to be a downturn in the stock market, though, that extra spending might dry up.
MARTIN: Speaking about housing, though, the housing market has been in a slump. What effect is that having on GDP?
HORSLEY: Yeah. Home sales are really anemic, and that is a drag on economic growth. Earlier this year, mortgage rates briefly dipped below 6%, and it looked as though we might start to see a modest recovery in the housing market. But Bostjancic says the war with Iran and rising inflation are now pushing mortgage rates in the wrong direction. Freddie Mac says the average cost of a 30-year home loan has now climbed to 6.66%.
BOSTJANCIC: Not good news for the housing market, which essentially has been stalled for several years now. Imagine how strong the growth would be if we could get the housing market back on its feet.
HORSLEY: You know, whenever we talk about GDP, it's helpful to think, compared to what? Compared to a recession, when the economy is shrinking, a growth rate of 1.5% looks pretty good. But it is slower growth than we had last year, and it's significantly slower than what we saw during most of the Biden administration.
MARTIN: That is NPR's Scott Horsley. Scott, thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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