The U.S. economy expanded at a weaker-than-expected pace in the second quarter, while inflation remained stubbornly above the Federal Reserve’s target, the Commerce Department reported Thursday.
Gross domestic product, a broad measure of goods and services, rose at just a 1.5% annual rate during the April-through-June period, according to Bureau of Economic Analysis data adjusted for seasonality and inflation.
Economists surveyed by Dow Jones had forecast a growth rate of 1.8%, following the 2.1% expansion recorded in the first quarter.
The shortfall in GDP growth was largely attributed to a decline in federal government spending and a drop in inventories, rather than weakness in the broader economy.
Personal spending rose 2.1% in the quarter, a marked improvement after eking out only a 0.4% gain in the first quarter, suggesting underlying consumer demand remained resilient.
A key measure of domestic demand, final sales to private domestic purchasers, posted a robust 3.9% increase, offering reassurance that core economic momentum had not collapsed.
A separate report showed the personal consumption expenditures price index, the Federal Reserve’s preferred inflation gauge, fell a seasonally adjusted 0.1% for June, placing the annual inflation rate at 3.7%.
Excluding food and energy, core PCE posted a monthly increase of 0.1% and an annual level of 3.3%, matching forecasts and remaining well above the Fed’s 2% target.
Inflation had been easing heading into 2026 but accelerated after the U.S. and Israel attacked Iran in late February, setting off a surge in energy prices that Fed officials worry will bleed over into the broader economy.
Energy goods and services prices tumbled by 5.9% in June, helped by a temporary ease in Middle East fighting that sent gasoline prices down 9.2%.
The reports came a day after a divided Fed voted 9-3 to hold its benchmark borrowing rate in a range between 3.5% and 3.75%, where it has remained all year.
The three dissenting votes came from regional presidents who have expressed concerns about higher prices and the failure to make progress toward the prices side of the central bank’s mandate.
On the quarterly basis, the PCE index surged 5.1% on the headline measure and 3.4% for core, underscoring the persistent inflationary pressure facing policymakers.
Consumer spending held up in June, with personal expenditures rising 0.3%, while personal income increased 0.2%, falling slightly short of the 0.3% estimate.
To sustain their spending, consumers dipped into their savings, pushing the personal savings rate down to 2.7%, the lowest level in four years.
Stock market futures turned positive following the data release, while Treasury yields moved sharply higher in early trading.