US economy grows sluggish 1.5% in second quarter as inflation tops Fed target

• Consumer spending remained resilient despite high interest rates, supported by a stronger job market adding an average 92,000 jobs monthly in 2026 compared to fewer than 10,000 monthly in 2025
• Core PCE inflation (excluding food and energy) stood at 3.3% year-over-year, barely changed from 3.4% in May, indicating persistent price pressures above the Fed's target
• Three regional Fed presidents dissented from the rate decision, advocating for increases to combat elevated inflation ahead of November midterm elections where economic frustrations could impact results

Summary

The US economy expanded at a sluggish 1.5% annual rate in Q2 2026, decelerating from 2.1% growth in Q1 and missing economist expectations. Rising imports were the primary drag on GDP growth, though consumer spending showed resilience.

Key Inflation Data:

The Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, rose 3.7% year-over-year in June, down from 4.1% in May. Core PCE (excluding food and energy) increased 3.3%, slightly below May's 3.4%. Both measures remain above the Fed's 2% target.

Monetary Policy:

Fed Chairman Kevin Warsh kept the benchmark interest rate unchanged for the fifth consecutive meeting on Wednesday. However, three regional Fed presidents dissented, advocating for rate increases to combat elevated inflation, highlighting internal divisions over policy direction.

Labor Market:

Employment has rebounded significantly, with employers adding an average of 92,000 jobs monthly in 2026, a dramatic improvement from fewer than 10,000 monthly additions in 2025 when high interest rates and tariff uncertainty suppressed hiring. This labor market strength has supported consumer spending despite elevated prices.

Market Context:

The economy has demonstrated resilience amid the Iran war and resulting energy price spikes. However, persistent inflation continues to frustrate consumers ahead of November's midterm elections, which could determine whether Republicans maintain Congressional control.

Note: This represents the Commerce Department's first of three GDP estimates for Q2, subject to future revisions.