Here’s what to watch in the GDP report:

Consumer Spending
Consumer spending, the main engine of the US economy, will be the most important part of the report for many. Economists project that outlays decelerated further in the second quarter to an annualized rate of 1.2%, the weakest pace of the expansion. Inflation-adjusted spending declined in May from the prior month, and June outlays are expected to be flat when reported later this week.

Economists had long been forecasting a shift in purchases from goods to services, but it’s unclear to what extent services spending can hold firm in the face of surging prices.

Decades-high inflation has throttled purchasing power, with Americans facing high prices for necessities like gasoline and groceries. A recent Census Bureau survey showed four in 10 Americans say it’s somewhat or very difficult to cover usual household expenses, the highest share since the question was first asked in August 2020.

Still, Blerina Uruci, US economist at T. Rowe Price Group Inc., said she’s more optimistic about the second half of the year. The worst of inflation has likely passed, and if the labor market stays strong and gas prices don’t spike again, “we’re going to have a bit of a revival in consumer spending,” she said.

Investment
The clearest example by which Fed interest-rate hikes are impacting the economy is the housing market, something that should be highly visible in Thursday’s report. The coinciding surge in mortgage rates has stifled demand, pushing up inventory and leading some buyers to back out of existing deals.

Michael Feroli, chief US economist at JPMorgan Chase & Co., expects residential investment dropped an annualized 13.5% in the second quarter. If realized, that would be the sharpest decline since the beginning of the pandemic.

Meantime, the pace of business investment is expected to cool substantially. Part of the slowdown may reflect growing concerns about the economic outlook. A survey of purchasing managers by S&P Global found firms’ expectations for the future deteriorated in July to the lowest since 2020. Some of the softening reflects inflation in capital goods, Feroli said.

Inventories & Trade
A slower build in inventories compared to the first three months of the year is poised to be an enormous headwind to second-quarter growth. The Atlanta Fed’s GDPNow estimate shows the change in inventories subtracted 2.5 percentage points from the headline figure it pegs at minus 1.6%.

Inventories also weighed on first-quarter GDP but not nearly to the same extent.