U.S. economic growth slows to 1.5% in second quarter as inflation exceeds Fed target
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- U.S. GDP expanded at a 1.5% annualized pace in Q2 2026, decelerating from 2.1% in Q1 and coming in below economist expectations, per the Commerce Department.
- Consumer spending — roughly 70% of U.S. economic activity — climbed at a 3.2% annual rate, up sharply from 0.5% in Q1, with Fitch's Olu Sonola saying "the consumer rescued the quarter."
- Business investment outside housing rose 8.4% annualized on AI-related spending, but imports surged 11.5% — including computer chips — subtracting 1.5 percentage points from headline GDP growth.
- The Fed's preferred PCE inflation index rose 3.7% year-over-year in June, down from 4.1% in May, but has run above the 2% target for more than five years.
- The Federal Reserve held its benchmark rate unchanged for a fifth straight meeting, with three regional Fed presidents dissenting in favor of a rate hike to fight elevated inflation.
- U.S. employers added an average 92,000 jobs per month in 2026, a sharp rebound from fewer than 10,000 per month in 2025.
- An AP-NORC poll found 72% of U.S. adults call it "extremely" or "very" important to prevent domestic oil and gas price increases, up from 67% in March.
Why it matters: The 1.5% headline undersells the economy: domestic demand grew 3.9% annualized, and the slowdown is almost entirely an AI-driven import surge that subtracts from GDP math rather than reflecting real weakness. But with PCE inflation stuck at 3.7% — far above the Fed's 2% target — and three Fed presidents already dissenting for a rate hike, the central bank faces growing pressure to act ahead of November midterms where 72% of voters cite energy prices as a top concern.
