The Federal Reserve reported that U.S. manufacturing expanded at a steady pace in July, with output growing 0.2% after a 0.3% increase in the previous month. Total industrial production also rose 0.2% in July, aligning with expectations for slower but sustained economic growth. The expansion was driven largely by gains in computers, machinery, and other business equipment, which offset declines in motor vehicles and clothing.
“Output of computer and electronic products continues to climb at a rapid pace — lifted by the AI boom — accounting for around half of overall growth,” Pantheon Macroeconomics Senior U.S. Economist Oliver Allen said in a note. “Output in lower value-added parts of the manufacturing sector continues to stagnate,” he added.
High-tech production reflects a broader trend of investment shifting toward capital-intensive industries. While sectors producing lower-value-added goods struggle, the data shows that businesses are prioritizing equipment upgrades and technology integration to maintain efficiency. This divergence creates a mixed picture for the industrial sector, where innovation drives the top line while traditional manufacturing faces headwinds.
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U.S. gross domestic product expanded at an annual rate of 1.5% during the second quarter, a slowdown from 2.1% in the first quarter. Consumer spending, investment, and exports fueled the increase, while lower government spending and higher imports subtracted from the calculation of total output, the Bureau of Economic Analysis said.
Looking ahead, Fed policymakers in a median forecast in June downgraded their estimate for U.S. economic growth this year to 2.2% from 2.4% in March. Sagging consumer sentiment and depressed retail spending have prompted concerns that the economy may lose more steam. Retail sales fell 0.6% in July after a 0.2% increase in June, with declines at gas stations and auto dealers.
“Consumer demand is likely to slow over the second half of this year as a fleeting boost from tax refunds fades,” Allen said. Even excluding volatile categories like gas stations and auto dealers, retail sales declined, suggesting broader weakness in household spending.
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The grim spending data likely reflects a dimming mood among households. Consumer sentiment fell 8% in August after two straight months of improvement, according to Joanne Hsu, director for surveys of consumers at the University of Michigan.
“Decreases in sentiment were seen across the political spectrum, with Republicans exhibiting the strongest month-to-month decline in August,” Hsu said in a statement. “Sentiment among Republicans is now 19% below readings just prior to the Iran conflict and the lowest since the 2024 election,” she added.
The survey also noted a large decline in the mood among older consumers, low-income consumers, and those lacking a college degree. A surge of investment in the infrastructure for artificial intelligence has spurred GDP growth this year, along with the wealth effect from rising equity prices, according to Deloitte. The firm last month marked up its forecast for growth in fixed business investment this year to 6.1% from 4%. High oil prices pose the biggest threat to economic growth, Deloitte said while releasing a baseline forecast of 2% GDP growth for 2026.
