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 1.5% in Q2 2026, decelerating from 2.1% in Q1 and falling below economist expectations, according to the Commerce Department.
- Imports surged at an 11.5% pace, shaving 1.5 percentage points off GDP growth, with the Commerce Department partly attributing the spike to shipments of computer chips and other products supporting AI investment.
- Consumer spending — which accounts for about 70% of U.S. economic activity — accelerated to a 3.2% annual pace, up sharply from 0.5% in the January-March quarter.
- Business investment excluding housing rose 8.4%, down from 10.6% the prior quarter but still strong, reflecting a surge in AI-related investment.
- PCE inflation rose 3.7% year-over-year in June, down from 4.1% in May, while core PCE ticked down to 3.3% from 3.4% — both still well above the Fed's 2% target.
- The Federal Reserve held its benchmark interest rate unchanged for the fifth straight meeting on Wednesday, with three regional Fed presidents dissenting in favor of rate hikes to fight elevated inflation.
- Employers have added an average of 92,000 jobs per month in 2026, a sharp rebound from fewer than 10,000 per month in 2025, when high interest rates and Trump's tariffs had discouraged hiring.
Why it matters: With PCE inflation still 1.7 percentage points above the Fed's 2% target and three regional Fed presidents dissenting against the central bank's wait-and-see stance, the stickiness of inflation raises the political stakes ahead of November's midterm elections, where frustration over the cost of living could determine whether Trump's Republicans keep full control of Congress.
