On the surface, the annualized growth rate of U.S. GDP in the second quarter slowed to 1.5%, but the reality beneath is quite different. Additionally, the U.S. PCE price index recorded its first monthly decline since 2020 in June...
The U.S. Bureau of Economic Analysis released a preliminary estimate on Thursday showing that U.S. gross domestic product (GDP) grew at an annualized rate of 1.5% in the second quarter after adjusting for inflation and seasonal factors, down from 2.1% in the first quarter.
Net exports declined, dragging down overall GDP performance; however, this component tends to fluctuate significantly between quarters and masks the underlying strength of U.S. domestic demand.
Economists therefore focus on final sales to domestic private purchasers—a measure that excludes net exports, inventory changes, and government spending. Data show this indicator rose by 3.9% in the second quarter, more than doubling its pace from the first quarter and reaching its highest level since early 2023. Consumer spending, which accounts for roughly two-thirds of U.S. economic activity, increased by 3.2%, far exceeding the 0.5% growth recorded in the first quarter.
Low unemployment and tax-cut policies have supported household consumption, driving U.S. households to increase spending on both goods and services. Business investment also remained robust, with the ongoing artificial intelligence investment boom continuing to fuel higher capital expenditures by corporations.
The report also noted that the U.S. economy is experiencing a strong recovery, gradually moving past the impact caused by the Iran conflict.
Although the conflict pushed up prices and dampened market sentiment, falling gasoline prices at the end of the quarter, along with larger-than-usual tax refunds and promotional activities, provided support to household spending.
Rebounding consumption coexists with energy-related risks
Another set of data released on Thursday showed that U.S. consumer spending rose by 0.4% month-over-month in June after adjusting for inflation, matching the fastest pace since July 2025.
The Federal Reserve’s preferred gauge of inflation—the June Personal Consumption Expenditures (PCE) price index—fell by 0.1% month-over-month, marking its first monthly decline since the onset of the pandemic in 2020. This further explains why the Fed opted to hold interest rates steady this week. The PCE inflation rate on a year-over-year basis eased to 3.7% from May’s three-year high of 4.1%.
However, it remains unclear whether inflation will continue to ease. The cooling of inflation in June was primarily driven by a drop in oil prices following a fragile interim ceasefire agreement between the U.S. and Iran.
At its core, the core PCE price index rose 0.1% month-over-month in June, below market expectations, while its year-over-year growth rate declined from 3.4% to 3.3%. The indicator has now remained above the Federal Reserve’s 2% target for the sixth consecutive year.
Employment growth remained stable in the second quarter, with the unemployment rate staying low. The labor market continues to support household consumption sentiment.
The U.S.-Iran conflict exerted economic pressure between April and June. Fuel prices and inflation surged significantly, eroding the real purchasing power of household wage income.
According to AAA data, the average price of regular gasoline in the second quarter was $4.22 per gallon. Before the U.S. and Israel escalated tensions involving Iran at the end of February, regular gasoline cost less than $3 per gallon. This month, gasoline prices have risen again, recently surpassing $4.10 per gallon, though they remain below the post-conflict peak of over $4.50 per gallon reached in May.
Economists view the energy price shock as the primary risk facing the U.S. economy in the second half of the year. Should inflation re-accelerate, it could prompt the Federal Reserve to further tighten policy.
Some companies have already observed that consumers are becoming more price-sensitive amid a high-inflation environment.
“Consumers are quiet but holding steady,” Procter & Gamble CFO Andre Schulten told The Wall Street Journal this week. “Every consumer is looking for value.”
Most major companies that have already released their quarterly earnings reported strong sales and profits. American Express saw growth in both sales and profits in the second quarter, primarily driven by increased spending among credit card members. Toy maker Hasbro raised its full-year outlook last week, citing sustained strong demand for games and toys.
On the day before the GDP report was released, the Federal Reserve decided to keep its benchmark interest rate unchanged in the range of 3.5% to 3.75%. The decision was approved by a 9-to-3 vote, with three regional Fed presidents dissenting and advocating for a 25-basis-point rate hike. The expanding camp favoring higher rates indicates growing internal disagreement within the Fed over inflation risks and policy direction.
In his post-meeting press conference, Fed Chair Worshe provided an overall positive assessment of the U.S. economy and labor market. He also noted robust productivity growth and strong investment in artificial intelligence, adding, “The economy has demonstrated impressive resilience.”
Editor/lambor