U.S. economy slowed to 1.5% growth rate in Q2; June core inflation at 3.3%
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Key Points
- Gross domestic product rose at just a 1.5% rate in the first quarter, but underlying economic drivers looked solid outside of a drop in inventories and government spending.
- Inflation readings as judged by the Federal Reserve’s preferred gauge were mostly in line but still well above the central bank’s 2% target.
- Consumer spending continued to climb but the savings rate hit a four-year low.
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U.S. economy slowed to 1.5% growth rate in Q2; June core inflation at 3.3%
Economic growth was weaker than expected in the second quarter though underlying drivers were mostly solid. At the same time, inflation in June held well above the Federal Reserve’s goal and complicated the central bank’s policy path, the Commerce Department reported Thursday.
Gross domestic product, a broad measure of goods and services, increased just 1.5% for the April-through June period, according to Bureau of Economic Analysis numbers adjusted for seasonality and inflation.
Economists surveyed by Dow Jones had been looking for a growth rate of 1.8%, following the 2.1% increase in the first quarter.
A separate report showed that the personal consumption expenditures price index, which is the Federal Reserve’s primary forecasting gauge, fell a seasonally adjusted 0.1% for the month, putting the annual inflation rate at 3.7%. The readings were in line with forecasts.
Excluding food and energy, core PCE posted a monthly increase of 0.1% and an annual level of 3.3%, against respective forecasts for 0.2% and 3.3%.
While the Fed technically uses the headline PCE number as its gauge for setting policy, most officials consider core inflation as a better indicator of longer-run trends.
Stock market futures were positive following the report while Treasury yields were sharply higher.
The reports come a day after a divided Fed voted 9-3 to hold its benchmark borrowing rate in a range between 3.5%-3.75%, where it has been all year.
Inflation has taken the primary focus for Fed policymakers as labor market indicators have stabilized this year, with the three dissenting votes coming from regional presidents who have expressed concerns about higher prices and the failure to make progress toward the prices side of the central bank’s mandate.
GDP: Better than the headline
While the GDP number was below expectations, the miss appeared to come from a decline in federal government spending and inventories. Other parts of the economy appeared strong.
Key areas of the economy continued to show improvement: Personal spending rose 2.1% after eking out a 0.4% gain in the first quarter, while a key indicator of underlying demand called final sales to private domestic purchasers posted a robust 3.9% increase.
However, inventories fell 0.7% and federal spending was off 0.3%, subtracting from the top-line reading.
Gross private domestic investment rose 0.5% while exports also increased 0.5% and imports declined 1.5%. Exports generally add to GDP while imports subtract.
Inflation: About as expected, but still too high
On the inflation readings, the figures were close to expected though still well above the Fed’s 2% target.
Inflation numbers had been easing heading into 2026 but accelerated after the U.S. and Israel attacked Iran in late February, setting off a surge in energy prices that Fed officials worry will bleed over into the broader economy.
Energy goods and services prices tumbled by 5.9% in June, helped by a temporary ease in the Middle East fighting that sent gasoline down 9.2%. Housing inflation also moderated, rising just 0.2%. Goods prices overall declined by 0.6% while services increased just 0.1%.
On a quarterly basis, the PCE index surged 5.1% on headline and 3.4% for core.
Spending held up for the month, with personal expenditures rising 0.3%, in line with expectations. Personal income was up 0.2%, which was below the 0.3% estimate.
However, consumers dipped into their savings to make ends meet. The personal savings rate declined to 2.7%, the lowest in four years.
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