GDP Growth Slowed to 1.5% in Second Quarter as Savings Rate Hit Three-Year Low

The U.S. economy grew at a 1.5% annual rate in the second quarter, according to a Commerce Department report Thursday. That's down from 2.1% in the first three months of the year.

Consumer spending, the engine that drives most of the U.S. economy, grew at a 2.1% pace during the quarter. Americans are still opening their wallets. The problem is how they're paying for it.

A separate Commerce Department inflation measure showed prices in June were up 3.7% from a year earlier. Inflation has been outpacing wage gains in recent months, according to the report, forcing shoppers to dip into savings or borrow money to support their spending.

The personal savings rate fell to 2.7% in June, a three-year low. When the cushion gets that thin, it doesn't take much of a shock—a bad month of car repairs, a medical bill, a layoff—to force people into debt or to pull back on spending altogether.

What dragged growth down

The slowdown wasn't really about consumers pulling back. It came from two other places: a decline in government spending and a jump in imports, which count against GDP in the standard calculation. Exports rose during the quarter, but imports rose faster.

Mark Zandi, chief economist at Moody's Analytics, pointed to tariffs as the wildcard behind the trade swings. "Trade has gone up and down and all around and clearly the tariffs are swinging things around," Zandi said. "One quarter it might add to growth. The next quarter it might subtract from growth. Net over time, it's kind of sort of a wash."

The mechanics work as Zandi described them, but the tariff regime is adding volatility to the numbers quarter to quarter, making it harder to read a clean signal on underlying momentum. Businesses that import goods are the ones absorbing or passing along those costs, and the timing of when they stock up or draw down inventory can swing GDP from one quarter to the next.

The Fed's bind

The Federal Reserve opted not to raise its benchmark interest rate this week, despite inflation running above the central bank's watched levels. A divided Fed held rates steady even with prices climbing faster than officials would like.

Cutting rates too soon risks reigniting inflation that's already running hot at 3.7%. Holding rates too long risks choking off growth that's already cooled from 2.1% to 1.5%, especially with consumers dipping into savings to keep spending. The Fed's decision to hold steady this week suggests officials remain wary of the inflation side of that equation.

A savings rate at a three-year low means households have less room to keep absorbing price increases. If wage growth doesn't catch up, consumer spending—the 2.1% pace propping up the whole economy—could face pressure faster than the current GDP data show.

What to watch

The Commerce Department's report is the government's first estimate for the quarter and is subject to revision as more complete data comes in. Trade and inventory figures in particular tend to get adjusted.

The numbers currently give both sides of the inflation-versus-growth debate evidence to point to, but neither side has a clean verdict.