GDP Grows Just 1.5% in Second Quarter as Inflation Stays Stuck Above 3%

The U.S. economy grew at a 1.5% annual rate in the second quarter, down from 2.1% in the first three months of 2026 and well short of the 2.1% pace economists polled by Reuters expected, according to the Commerce Department.

The slowdown came on the same day the Federal Reserve's preferred inflation gauge showed prices still running hot. The personal consumption expenditures price index rose 3.7% year-over-year in June, according to the Commerce Department. That's down from a 4.1% increase in May, but still nearly double the Fed's 2% target. Core inflation, which strips out food and energy, came in at 3.3%, barely moved from May's 3.4%.

Inflation is cooling, technically. It's still nowhere near where the Fed wants it, three and a half years after this problem was supposed to be temporary.

Imports, Not Consumers, Dragged Growth Down

Consumers didn't cause the slowdown. Consumer spending, which makes up about 70% of economic activity, actually accelerated to a 3.2% annual pace, way up from a weak 0.5% in the first quarter, according to the Commerce Department.

The drag came from imports, which surged at an 11.5% pace. Imports get subtracted from GDP because the number is only supposed to measure what's produced domestically. The Associated Press reported that a wave of computer chip and AI-related hardware shipments drove that import surge, and it alone shaved 1.5 percentage points off growth.

Business investment outside of housing stayed strong, rising 8.4%, down from 10.6% in the first quarter but still a clear sign that companies are pouring money into artificial intelligence infrastructure, per the AP.

The picture isn't a consumer pulling back. It's an economy importing heavily to build out AI capacity, and that import math punched a hole in the topline number. This represents a different dynamic than a demand collapse.

The Iran War's Fingerprints on Gas Prices

CBS News tied the slowdown directly to the ongoing conflict in the Middle East, reporting that disruptions to shipping through the Strait of Hormuz have driven gasoline prices from an average of $2.98 a gallon just before the war started in late February to over $4 a gallon now.

This is a real hit to household budgets, and it's not clear it's over. Thomas Ryan, senior North America economist at Capital Economics, told CBS News that while households have absorbed the shock so far, "it remains unclear whether they can absorb another hit now that retail gasoline prices have risen back above $4 a gallon."

Oxford Economics was more blunt in a note cited by CBS News: "With gas prices rising again, the squeeze on real incomes will put renewed pressure on consumer spending in the second half of the year."

Energy costs hit lower- and middle-income households hardest because gas and heating aren't optional purchases. If oil prices stay elevated because of the war, the resilience in this quarter's consumer spending number could prove temporary.

The Fed Held Rates, But Not Unanimously

The Federal Reserve left its benchmark interest rate unchanged on Wednesday for the fifth consecutive meeting, according to the AP. But it wasn't a clean decision. Three regional Fed presidents dissented, arguing the central bank should be raising rates to fight inflation that's still running well above target.

This signals real disagreement within the institution charged with managing this. When three regional presidents want tighter policy while the committee holds steady, it raises questions about whether 3.7% inflation is close enough to declare victory, or whether it's dangerously sticky.

The Job Market's Turnaround

One clear bright spot is hiring. The AP reported that employers have added an average of 92,000 jobs a month so far this year, a sharp improvement from fewer than 10,000 jobs a month in 2025, when high interest rates and what the AP described as Trump's "erratic use of tariffs" discouraged business hiring.

This is a legitimate, sourced criticism of the administration's trade policy last year, not editorial spin. Businesses pulled back on hiring when tariff policy kept shifting, and now that some of that uncertainty has eased, hiring has rebounded meaningfully.

What's Ahead

This is only the first of three Commerce Department estimates of second-quarter growth, according to the AP, so the 1.5% figure could be revised up or down as more complete data comes in.

The bigger question hanging over all of it is political. High costs of living remain a top frustration for voters heading into November's midterms, which will decide whether Republicans keep full control of Congress, the AP reported. An economy growing at 1.5% with inflation stuck near 3.7% and gas back above $4 a gallon is not the message the White House wants heading into that fight, regardless of how strong hiring numbers or AI investment figures look on paper.