Implications: Economic growth was mediocre in the second quarter, with inflation running hot due to the Iran War.  Real GDP grew at a 1.5% annual rate in Q2, lagging the consensus expected 2.0% as well as the 2.1% growth rate in Q1.  Personal spending, which grew at a 3.2% rate, was the key driver for economic growth in the second quarter.  However, the AI/data center build-out also remains a very important factor.  Data center construction grew at a 15.2% rate, business investment in information processing equipment grew at an 8.3% pace, investment in software grew at an 11.4% rate, and R&D was up at a 7.5% pace.  Without this build-out, real GDP would have grown at less than a 1% pace.  By contrast, the best news in today’s report was that Core Real GDP – which includes consumer spending, business fixed investment, and home building, and excludes more volatile categories like government purchases, inventories, and international trade – grew at a 3.9% rate in the second quarter, the fastest pace in more than three years, and is now up 2.6% from a year ago.  In the meantime, inflation was a problem, largely due to higher oil prices, with GDP prices up at a 6.2% rate in Q2 and up 4.3% from a year ago.  As a result, nominal GDP rose at a 7.9% pace in Q2 and is up 5.6% annualized in the past two years.  We expect this to drop in the quarters ahead, but if it does not the Federal Reserve will likely get more pressure for a rate hike.  One reason we think nominal GDP will drop is that the M2 measure of the money supply has grown just 4.8% annualized over the past two years, which is less than nominal GDP and less than the 6.0% pre-COVID pace when inflation averaged below 2.0%.  In other news this morning, new claims for unemployment insurance rose 9,000 last week to a still very low 197,000.  Continuing claims declined 7,000 to 1.782 million.  These figures suggest moderate payroll growth in July.

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