CICC: Strong U.S. Domestic Demand, Fed Policy Focus Remains on Inflation Control
Taylor Wilson
CICC's latest report argues that while US Q2 GDP missed expectations, private domestic demand grew at its fastest pace in two years, revealing an economy far more resilient than the headline number suggests; this means the Fed is unlikely to pivot to rate cuts anytime soon — controlling inflation stays the policy priority.
GDP missed expectations — so why does CICC say "not weak"?
Q2 GDP grew at an annualized 1.5%, below consensus, but the drag came from imports, inventories, and government spending — volatile line items, not a contraction in private-sector demand.
This means → the headline looks soft, but the engine is still running; the car just had extra cargo weighing it down temporarily.
Private domestic final sales — the clearest gauge of real demand — grew at an annualized 3.9%, more than double Q1's 1.7% and the fastest since Q1 2023.
In plain terms = American consumers kept spending; businesses kept investing. The economy's foundation is solid.
Where exactly is the strength in consumption and investment?
Real personal consumption grew at an annualized 3.2%, up sharply from Q1's 0.5%, contributing 2.12 percentage points to GDP.
Equipment investment surged at an annualized 15.2%; AI-related projects alone added roughly 0.72 percentage points to year-on-year GDP growth.
Residential investment rose 1.5%, turning positive for the first time since Q1 2025.
This means → growth is spreading from AI capex as the lone pillar toward consumption, housing, and broader sectors — the economy is no longer standing on one leg.
Has inflation actually come down?
Q2 core PCE — the personal-consumption-expenditures price index, the Fed's preferred inflation gauge — rose 3.4% annualized, down noticeably from the prior quarter's 4.4%.
June PCE fell 0.1% month-on-month, the first monthly decline since the 2020 pandemic, largely thanks to easing tensions in the Strait of Hormuz pushing oil prices lower.
But oil prices have rebounded since July; CICC sees significant uncertainty in the inflation path ahead.
In plain terms = June's dip was a lucky break from geopolitics, not a confirmed trend. One oil-price bounce and inflation can snap right back.
Why isn't the Fed cutting rates?
The Fed held rates steady at its July meeting. Markets fear it is repeating the mistake of acting too late, driving long-end Treasury yields sharply higher.
This reflects a core market anxiety: if inflation re-accelerates, the Fed may have to hike again rather than cut.
CICC argues that strong private demand means ample domestic momentum — which also raises the risk of renewed inflation pressure.
This means → CICC believes the Fed's policy focus remains squarely on inflation, and a "pre-emptive hike" is a reasonable next step — rate-cut expectations should be dialed down.
What does broadening growth mean for equity rotation?
Q2 growth showed clear broadening: momentum spread from AI capex into industrial equipment, transportation gear, software, R&D, and further into mass-market consumption and housing.
This reflects an economy that has not entered a "stall after a single-sector boom" phase.
Recent US equity rotation — capital moving from a handful of AI leaders into a wider set of sectors — aligns with this GDP broadening, and CICC expects the rotation to continue.
Key uncertainties ahead: volatile oil prices, fading fiscal stimulus, and tariff-policy disruptions — any of these could interrupt the broadening thesis.
Content is for reference only, not financial advice.