The U.S. economy expanded at a modest pace of 1.5% in the second quarter of 2026, according to data released Thursday by the Commerce Department, reflecting continued resilience amid geopolitical tensions related to the conflict in Iran. The growth, while steady, fell short of expectations and represents a slowdown compared to earlier periods.

Consumer spending was the primary driver, contributing 2.1 percentage points to the overall increase in gross domestic product (GDP). Business investment added another 1.2 points, largely fueled by heightened demand for equipment and intellectual property, notably in the artificial intelligence (AI) sector. Major AI companies, known as hyperscalers, are projected to invest more than $700 billion this year, spurring demand for computer chips, construction machinery, and energy infrastructure such as gas turbines. Investment in advanced AI models also accounted for a significant portion of the business spending increase.

Offsetting these gains, net exports subtracted one percentage point from growth. The decline in government spending also reduced GDP figures in the quarter, a statistical effect because of accounting methods, though some analysts suggest lower government expenditure could benefit the private sector over time.

Despite this growth, the economy is behind the administration’s target of 3% annual GDP expansion. Treasury Secretary Scott Bessent has set this goal as a benchmark for robust economic performance. Previous fiscal policies, including last year’s tax legislation and deregulation efforts, aimed to stimulate faster growth; however, trade restrictions and border tariffs introduced under the current administration have increased costs and created uncertainty for businesses, dampening the overall economic momentum.

Changes to the tax code, such as expanded corporate expensing and rollback of regulatory measures from the prior administration, have been credited with improving investment conditions. Policies reversing regulations like the Biden administration’s Clean Power plan, which would have limited new gas-fired power plants critical for AI data centers, and the cancellation of electric vehicle mandates, have provided more flexibility for industry participants.

Consumer finances have benefited from larger tax refunds and targeted deductions, including exemptions on overtime pay and tips and increased deductions for seniors. Nevertheless, persistent inflation continues to erode wage gains and real purchasing power. The core personal consumption expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge excluding volatile food and energy prices, rose 0.1% in June and remains elevated at 3.3% over the past year.

Rising prices appear to be constraining household savings. The personal savings rate dropped to 2.7% in June, its lowest level since early 2022, down from above 6% during much of the previous administration’s first term. Real disposable personal income fell 1.5% in the quarter, marking a reversal from the 2% to 4% growth rates seen before the COVID-19 pandemic.

Some advocates within the administration’s base have expressed frustration with the emphasis on tariffs, suggesting a return to more traditional supply-side policies that were credited with broad economic growth earlier in the current administration’s tenure. Public opinion on these issues remains varied, with many Americans reportedly hoping for a clear path toward sustained economic expansion.