Dive Brief:

• U.S. manufacturing grew at a steady pace last month as production of computers, machinery and other business equipment offset slowdowns in categories including motor vehicles and clothing, the Federal Reserve said Tuesday.
• Both manufacturing and industrial production expanded 0.2% in July after 0.3% growth in June, the Fed reported. During the 12 months through July, total industrial production rose 1.1%. 
• “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 said.

Dive Insight:

Although falling short of forecasts, industrial production last month aligned with expectations of slower but sustained economic growth.

U.S. gross domestic product expanded at an annual rate of 1.5% during the second quarter, slowing from 2.1% growth during the first three months of the year, according to the Bureau of Economic Analysis.

Consumer spending, investment and exports fueled the increase in real GDP during Q2, while lower government spending and higher imports subtracted from the calculation of total output, the BEA 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.

“Consumer demand is likely to slow over the second half of this year as a fleeting boost from tax refunds fades,” Allen said.

Retail sales last month fell 0.6%, well short of forecasts, after a 0.2% increase in June, the Census Bureau reported Friday.

Sales at gas stations and auto dealers decreased 0.9% and 2%, respectively, the Census Bureau said, with lower gas sales reflecting cheaper prices at the pump. Even excluding those two volatile categories, however, retail sales declined.

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 said, noting 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, which 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.