The U.S. economy expanded at a weaker-than-expected pace in the second quarter, while inflation remained well above the Federal Reserve’s goal, complicating the central bank’s policy outlook.
Gross domestic product rose at an annualized rate of just 1.5% for the April-through-June period, according to Bureau of Economic Analysis data adjusted for seasonality and inflation.
Economists surveyed by Dow Jones had forecast a 1.8% growth rate, following the 2.1% expansion recorded in the first quarter.
The shortfall was largely driven by a decline in federal government spending and inventories, while other areas of the economy demonstrated continued resilience.
Personal spending rose 2.1% after a modest 0.4% gain in the first quarter, and final sales to private domestic purchasers posted a robust 3.9% increase, signaling solid underlying demand.
Inventories fell 0.7% and federal spending declined 0.3%, both subtracting meaningfully from the top-line GDP reading.
Gross private domestic investment rose 0.5%, exports increased 0.5%, and imports declined 1.5%, with exports adding to growth while imports subtracted.
A separate Commerce Department report showed the personal consumption expenditures price index, the Federal Reserve’s preferred inflation gauge, fell a seasonally adjusted 0.1% in June, placing the annual inflation rate at 3.7%.
Excluding food and energy, core PCE posted a monthly increase of 0.1% and an annual rate of 3.3%, matching forecasts for the annual figure while coming in below the 0.2% monthly estimate.
On a quarterly basis, the headline PCE index surged 5.1% while core came in at 3.4%, both remaining significantly above the Fed’s 2% target.
Inflation had been easing heading into 2026 but accelerated after the U.S. and Israel attacked Iran in late February, triggering a surge in energy prices that Fed officials worry will spread into the broader economy.
Energy goods and services prices tumbled 5.9% in June, helped by a temporary easing in Middle East fighting that sent gasoline prices down 9.2%, while housing inflation rose just 0.2%.
The reports arrived one day after a divided Fed voted 9-3 to hold its benchmark borrowing rate in a range between 3.5% and 3.75%, where it has remained all year.
The three dissenting votes came from regional presidents who have expressed concerns about elevated prices and insufficient progress toward the prices side of the central bank’s dual mandate.
Stock market futures were positive following Thursday’s data release, while Treasury yields moved sharply higher in response to the mixed economic picture.
Consumer spending held up in June, with personal expenditures rising 0.3% in line with expectations, though personal income grew just 0.2%, falling short of the 0.3% estimate.
Consumers dipped into their savings to sustain spending activity, pushing the personal savings rate down to 2.7%, the lowest level recorded in four years.
