Economic growth in the second quarter was weaker than expected, but fundamentals remained mostly strong. At the same time, June inflation was well above the Federal Reserve’s target, complicating the central bank’s policy direction, the Commerce Department reported Thursday.
Gross domestic product (GDP), a broad measure of goods and services, rose just 1.5% from April to June, according to figures from the Bureau of Economic Analysis, which adjust for seasonality and inflation.
Economists surveyed by Dow Jones had expected growth of 1.8%, following a 2.1% increase in the first quarter.
A separate report said the Federal Reserve’s main forecast indicator, the Personal Consumption Expenditure Price Index, fell a seasonally adjusted 0.1% in the month, bringing annual inflation to 3.7%. Measurements matched predictions.
Core PCE, excluding food and energy, increased 0.1% month-on-month and 3.3% annually, versus expectations of 0.2% and 3.3%, respectively.
Although the Fed technically uses the headline PCE number as a measure for its policy decisions, most officials believe core inflation is a better indicator of long-term trends.
Stock market futures rose on the report, and U.S. Treasury yields rose sharply.
The report came a day after a divided Federal Reserve voted 9-3 to keep the benchmark borrowing rate unchanged throughout the year in a range of 3.5% to 3.75%.
Inflation has been a main focus for Fed policymakers this year as labor market indicators have stabilized, with the three negative votes coming from regional presidents who have expressed concern about rising prices and the central bank’s failure to make progress on prices.
GDP: better than the headlines
Although the GDP numbers were lower than expected, the disappointment was likely due to lower federal spending and inventories. Other parts of the economy looked solid.
Key sectors of the economy continued to show improvement, with consumer spending increasing 2.1%, following a 0.4% increase in the first quarter, and a key indicator of latent demand known as final sales to domestic private buyers posting a strong 3.9% increase.
But inventories fell 0.7% and federal spending fell 0.3%, subtracted from the top-line number.
Private gross domestic investment increased by 0.5%, but exports also increased by 0.5% and imports decreased by 1.5%. Typically, exports are added to GDP and imports are subtracted.
Inflation: About as expected, but still too high
Inflation was still well above the Fed’s 2% target, but it was close to expectations.
Inflation had been easing into 2026, but has accelerated since the U.S. and Israel attacked Iran in late February, causing energy prices to soar that Fed officials fear will ripple through the economy.
Prices of energy products and services fell 5.9% in June, helped by a 9.2% drop in gasoline prices due to a temporary easing of the Middle East conflict. Housing inflation also slowed, rising only 0.2%. Product prices overall fell by 0.6%, but services prices rose by only 0.1%.
On a quarterly basis, the PCE index rose 5.1% for the composite index and 3.4% for the core index.
Spending remained strong for the month, with personal spending rising 0.3%, in line with expectations. Personal income increased by 0.2%, but this was lower than the expected 0.3%.
However, consumers withdrew their savings to make ends meet. The personal savings rate fell to 2.7%, the lowest level in four years.
