The US economy grew at a seasonally adjusted annual rate of 1.5% in the second quarter of 2026, according to data released by the US Commerce Department. The figure fell short of the 1.8% growth rate forecast by economists surveyed by Dow Jones, though estimates had ranged from 0.8% to 2.9% prior to the release.
Growth slowed from the 2.1% annual rate recorded in the first quarter of 2026. The war in the Middle East shook energy prices and supply chains, contributing to the economic slowdown. The US and Israel attacked Iran in late February, setting off a surge in energy prices that has persisted through the second quarter.
Underlying demand accelerates
Despite the headline miss, final sales to private domestic purchasers, a key indicator of underlying demand, posted a 3.9% increase in the second quarter. This acceleration from the 1.7% gain in the first quarter represents the strongest pace since early 2023. Personal spending rose 2.1% in the second quarter, following a 0.4% gain in the previous three months.
Gross private domestic investment rose 0.5% in the second quarter. Exports increased 0.5% while imports declined 1.5%. Inventories fell 0.7% and federal government spending declined 0.3% during the period. Current-dollar GDP increased at an annualized rate of 7.9% in the second quarter.
Inflation eases but remains elevated
The personal consumption expenditures (PCE) price index, the Federal Reserve’s primary forecasting gauge for inflation, fell 0.1% on a seasonally adjusted monthly basis in June. This put the annual inflation rate at 3.7%, down from 4.1% in May. Core PCE, excluding food and energy, rose 0.1% monthly and 3.3% annually in June, compared with a 3.4% annual rate in May.
Energy goods and services prices tumbled by 5.9% in June, with gasoline down 9.2%. Housing inflation moderated, rising just 0.2% in June. Goods prices overall declined by 0.6% while services increased just 0.1%. On a quarterly basis, however, the PCE index surged 5.1% headline and 3.4% for core.
Inflation remains well above the Federal Reserve's 2% target. US consumer prices rose at a rate of 3.5% in the year to June 2026. Prices have been rising above the central bank's target for more than five years.
Federal Reserve holds rates steady
The Federal Reserve voted 9-3 to hold its benchmark borrowing rate in a range between 3.5% and 3.75%. This decision occurred after officials kept policy unchanged for a fifth consecutive time. Three dissenting votes came from regional presidents concerned about higher prices and lack of progress on the inflation mandate; they preferred a quarter-percentage-point increase.
Federal Reserve Chairman Kevin Warsh warned there was no 'magic wand' to tackle rising prices. Most Fed officials consider core PCE as a better indicator of longer-run trends. Officials worry that the surge in energy prices will spill over into the broader economy. Average gasoline prices have risen back above $4 a gallon amid renewed hostilities in the Middle East.
Stock market futures were positive and Treasury yields sharply higher after the GDP and inflation reports were released on Thursday, one day after the Federal Reserve meeting.
Consumer behavior and labor market
Personal expenditures rose 0.3% in June, in line with expectations, while personal income was up 0.2%, below the 0.3% estimate. The personal savings rate declined to 2.7%, the lowest in four years. Households have been tapping savings and saving less as wages are barely keeping up with inflation.
Americans continued to spend on motor vehicles, particularly light-duty trucks, furniture, and prescription drugs despite high inflation. Factors supporting household spending in the second quarter included declining gasoline prices at the end of the quarter, tax refunds above expectations, and corporate discount campaigns. Higher-income households benefiting from strong growth in asset prices are also driving spending.
Labor market indicators have stabilized in 2026. US employers added an average of 92,000 jobs per month in 2026, compared with fewer than 10,000 jobs per month in 2025. Initial jobless claims for the week ending July 25 were 197,000, and the four-week moving average fell to 202,750.
The midterm elections will see the Democratic Party attempting to wrest control of Congress from President Donald Trump’s Republicans. Higher costs have frustrated Americans ahead of the November vote, which could determine whether the Republicans keep full control of Congress.