U.S. economy turns in sluggish 1.5% second-quarter growth and inflation remains above Fed target
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- U.S. GDP grew at a 1.5% annual pace in Q2 (April–June), decelerating from 2.1% in Q1 and missing economist expectations, with rising imports subtracting 1.5 percentage points from the headline figure.
- Consumer spending accelerated to a 3.2% annual pace from just 0.5% in Q1, accounting for roughly 70% of U.S. economic activity and 'rescuing the quarter,' according to Fitch Ratings' Olu Sonola.
- Business investment outside housing rose at an 8.4% annual pace, down from 10.6% in Q1 but still strong, driven by a surge in AI-related spending on computer chips and equipment.
- Imports surged at an 11.5% pace, partly on shipments of chips and other AI-supporting products, which the Commerce Department subtracts from GDP because they aren't U.S.-produced.
- The Federal Reserve's preferred PCE inflation gauge rose 3.7% year-over-year in June, down from 4.1% in May but still above the 2% target for more than five years; core PCE was up 3.3%.
- The Federal Reserve held its benchmark rate unchanged for a fifth straight meeting on Wednesday, with three regional Fed presidents dissenting in favor of a rate hike to combat elevated inflation.
- Employers are adding an average 92,000 jobs per month in 2026, a sharp reversal from fewer than 10,000 per month in 2025 when high interest rates and tariffs suppressed hiring.
Why it matters: The headline 1.5% masks a split economy: core domestic demand grew 3.9% and consumer spending hit 3.2%, but with PCE inflation still above the Fed's 2% target for five-plus years and three regional Fed presidents already dissenting against a hold, the central bank faces growing internal pressure heading into the November midterms where affordability is the top voter issue.
