The US economy grew at an annualized rate of 1.5% in the second quarter, falling short of economists’ expectations, while June core inflation remained well above the Federal Reserve’s 2% target, according to economic data released Thursday.
Gross domestic product, which measures the output of goods and services across the economy, increased 1.5% during the April-to-June period after expanding 2.1% in the first quarter. Economists surveyed by Dow Jones had expected second-quarter growth of 1.8%.
US economy slows in second quarter
The weaker headline GDP figure was largely influenced by declines in federal government spending and inventories, while several other parts of the economy showed stronger performance.
Personal consumption, a key driver of the US economy, increased 2.1% in the second quarter, accelerating sharply from the 0.4% gain recorded in the first quarter.
Final sales to private domestic purchasers, an important measure of underlying demand, rose 3.9%. Gross private domestic investment increased 0.5%, while exports also advanced 0.5%.
Imports declined 1.5%. Because imports are deducted when calculating GDP, the fall provided some support to the overall growth figure.
However, inventories dropped 0.7% and federal government spending declined 0.3%, weighing on the headline GDP result.
June core inflation remains above Fed target
A separate inflation report showed that the personal consumption expenditures price index, the Federal Reserve’s primary inflation gauge, declined 0.1% in June on a seasonally adjusted monthly basis. The annual headline inflation rate stood at 3.7%, matching expectations.
Core PCE inflation, which excludes food and energy prices, increased 0.1% in June and was up 3.3% from a year earlier. The annual core reading matched economists’ expectations, while the monthly increase was below the 0.2% forecast.
Although the Federal Reserve formally uses headline PCE inflation when assessing its policy target, many policymakers view core inflation as a useful measure of longer-term price trends.
Inflation remains well above Federal Reserve goal
Despite some moderation in individual price categories, inflation remains significantly above the Federal Reserve’s 2% target.
Energy goods and services prices fell 5.9% in June, while gasoline prices dropped 9.2%. Housing inflation also moderated, increasing 0.2%. Overall goods prices declined 0.6%, while services prices rose 0.1%.
On a quarterly basis, the PCE price index increased 5.1% at an annualized rate, while core PCE rose 3.4%.
The supplied economic data said inflation had been easing heading into 2026 before accelerating after the US and Israel attacked Iran in late February. The resulting rise in energy prices raised concerns among Federal Reserve officials about broader inflationary pressures.
Consumer spending remains resilient
Consumer spending continued to hold up in June. Personal expenditures increased 0.3%, matching expectations, while personal income rose 0.2%, below the 0.3% forecast.
However, the figures also showed signs of pressure on household finances. The personal savings rate fell to 2.7%, its lowest level in four years, suggesting consumers were relying more heavily on existing savings to support spending.
Fed holds interest rates steady
The economic figures arrived a day after the Federal Reserve voted 9-3 to keep its benchmark borrowing rate in a range of 3.5% to 3.75%. The rate has remained at that level throughout the year.
Inflation has remained a major concern for policymakers as labor-market indicators have stabilized. The three dissenting votes came from regional Federal Reserve presidents who have expressed concerns about elevated prices and limited progress toward the central bank’s inflation objective.
Markets react to economic data
US stock market futures moved higher after the economic reports, while Treasury yields rose sharply.
The latest figures present a mixed picture for policymakers. Economic growth was weaker than expected in the second quarter, but consumer spending remained relatively strong and inflation continued to exceed the Federal Reserve’s target.
The combination leaves the central bank balancing slower economic growth against persistent price pressures as it assesses the outlook for monetary policy.
Source: U.S. Commerce Department economic reports, as provided in the supplied material.
