Wealth Insights

Economy Commentary

The Economy

Running Faster To Stay In Place?

August 2026

The initial estimate from the Bureau of Economic Analysis (BEA) shows real GDP grew at an annual rate of 1.5 percent in Q2. There is, however, more to Q2 growth than meets the eye. A wider trade deficit than that seen in Q1 knocked a full percentage point off top-line real GDP growth, while a much larger drawdown in nonfarm business inventories than that seen in Q1 knocked another seven-tenths of a percentage point off top-line growth. At the same time, real private domestic demand – combined business fixed investment, residential fixed investment, and consumer spending – grew at an annual rate of 3.9 percent in Q2 after adjusting for price changes, the fastest quarterly growth rate since Q1 2023. This suggests a far more robust pace of economic activity than implied by the headline real GDP growth print. Of the two measures, we routinely point to changes in real private domestic demand as a far more useful guide to the health of the U.S. economy.

Real consumer spending grew at an annual rate of 3.2 percent, a nice bounce back from the tepid 0.5 percent pace logged in Q1. Real business fixed investment grew at an annual rate of 8.4 percent in Q2 after having grown at a 10.6 percent rate in Q1, with real business outlays on equipment and machinery growing at a 15.2 percent rate and real spending on intellectual property products, the vast majority of which consists of computer software and R&D outlays, growing at an annual rate of 8.8 percent. Spending on intellectual property products is an early indicator of trends in labor productivity growth, and much of the spending on equipment and machinery is also setting the stage for faster productivity growth down the road. There are, however, lingering soft spots in real private domestic demand. For instance, real business spending on structures contracted at an annual rate of 5.0 percent in Q2, the tenth consecutive quarterly contraction. And, while real residential fixed investment grew at a 1.5 percent rate in Q2 after five straight quarterly contractions, that growth was more than accounted for by a faster pace of single family construction which seems highly unlikely to be sustained over the back half of 2026.

At the same time, we’d argue that even what were interpreted as drags on Q2 real GDP growth are to some degree setting the stage for faster growth over coming quarters. Recall that imports of goods and services into the U.S. are treated as drags on GDP growth, but this is somewhat misleading as a sizable share of goods imports are either raw materials or intermediate goods used in the production of final consumer or capital goods. Historically, that share has hovered around fifty percent, but over the past two quarters that share was fifty-nine percent. Though treated as drags on current quarter GDP growth upon reaching the U.S., these imports are actually contributing to growth down the road, particularly to the extent that imported capital goods ultimately contribute to faster labor productivity growth.

Additionally, though to some extent simply reversing the spike seen in early 2025 in response to sweeping changes in U.S. trade policy, the steady drawdown in nonfarm business inventories can also be sending a signal about underlying economic growth. We think this is particularly the case in the manufacturing sector, with a steady and sizable drawdown in inventories coinciding with strengthening business investment spending and the improvement in conditions in the manufacturing sector. With manufacturers seeing steady growth in new orders and rising backlogs of unfilled orders, it is reasonable to expect growth in employment and output in the manufacturing sector in the months ahead.

So, while the top-line growth print was not all that inspiring, the details of the Q2 GDP data paint a picture of a more vigorous pace of economic activity. There is, however, one element of the Q2 GDP data that has not gotten much attention, which is what remains a wide gap between growth in real, i.e., adjusted for price changes, and nominal, i.e., measured in current prices, GDP. In a sense, this seems like old news as it is simply another way to illustrate the extent to which faster inflation has been impacting the economy. Whether to consumers paying higher prices for final goods and services or to businesses paying higher prices for inputs and services, this has for some time been a source of considerable frustration.

To that point, while real GDP grew at an annual rate of 1.5 percent in Q2, nominal GDP grew at a 7.9 percent rate, with the gap between the two reflecting the rate at which prices rose during the quarter. Though not to the extent seen in Q2, the spread between real and nominal growth has been considerably wider in the post-pandemic years than had been the case prior to the pandemic. For instance, the average spread between growth in nominal and real GDP over the fifteen years prior to the pandemic was 1.84 percent, never larger than 3.90 percent. Since 2021, however, the average spread is 4.43 percent, with a high of 9.41 percent in Q2 2022. Again, to the extent that it reflects the pace at which prices have risen, the yawning gap between nominal and real growth over the past five-plus years is not at all consistent with the FOMC’s 2.0 percent inflation target.

At the same time, however, the sustained rapid growth in nominal GDP helps account for what has been exceptional growth in corporate profits over recent years, which to some is hard to square with real GDP growth having fallen back into the pre-pandemic trend rate of around two percent. Growth in nominal GDP is generally seen as a proxy for growth in business revenue, but keep in mind that GDP includes business inventories, making it a less than perfect proxy for top-line business revenue. Stripping inventories out of GDP yields the metric known as final sales of domestic product (final sales), a truer reflection of total business revenue. The point remains the same, though, as real final sales grew at an annual rate of 2.2 percent in Q2 while nominal final sales grew at an 8.7 percent rate.

To our point about the gap between real and nominal growth being significantly wider in the post-pandemic years than had previously been the case, as of Q2 real final sales were just over fifteen percent higher than in Q4 2019 while nominal final sales were forty-nine percent higher. Think of the growing gap between nominal and real final sales as the cumulative increase in prices over recent years. Still, while final sales illustrate rapid growth in total revenue, that is only half the story when it comes to growth in profits, and just as consumers have faced rapidly rising prices over recent years, businesses have contended with rapidly rising input prices, with the absorption of tariffs and higher energy prices adding fuel to an already burning fire. The data on corporate profits, however, show that even in the face of rapidly rising input prices, corporate profits have continued to grow at a notably rapid pace. Growth in both before-tax and after-tax profits, as measured in the GDP data, accelerated sharply over the back half of 2025, and each grew at a double-digit pace in Q1 2026 (the BEA’s Q2 profit data will not be released until later this month).

Note that the measure of profits in the GDP data covers a much wider universe of firms than the more commonly followed S&P 500 measure of profits. Though obviously the rate of growth varies across industry groups, profit growth has nonetheless been broadly based which, in turn, has been reflected in equity valuations. Keep in mind, however, that the flip side of inflation moving back to, or at least closer to, the FOMC’s 2.0 percent target rate is slower revenue growth. To that point, in the fifteen years prior to the pandemic average annual growth in (nominal) final sales of domestic product was 3.9 percent, compared with average annual growth of 7.5 percent from 2021 through 2025, with growth set to top that pace in 2026.

One reason investors are so focused on corporate guidance on revenue and costs is that almost no one sees recent rates of revenue growth as being sustainable for much longer, making cost control a more critical driver of profit growth. Still, even with effective cost controls profit growth is likely to be slower, perhaps meaningfully so, going forward than has been the case over recent years. To be sure, whether, to what extent, and how inflation slows – consumers no longer being able/willing to accept further price increases, a downturn in the broader economy, significant efficiency gains brought about by AI and faster labor productivity growth – will be a key determinant of how profits fare. To follow up on an earlier point, the only way that more rapid growth in nominal GDP/nominal final sales is consistent with the FOMC’s 2.0 percent inflation target is if there is a meaningful and sustained increase in the trend rate of real growth, which still seems trapped at around a two percent pace. This is the promise offered by AI and faster labor productivity growth, but we’re not there yet, and at this point no one knows how close we’ll get and when we’ll get there. Barring that, however, the rapid growth in top-line revenue seen over recent years will at some point give way to more measured growth.

Source: Bureau of Economic Analysis

As of August 14, 2026