US GDP Growth Slowed to 1.5% in Q2; Consumer Spending Rose

The U.S. economy grew at a 1.5% annualized rate in the second quarter, the Commerce Department said Thursday. The print missed the 2.1% consensus forecast and marked a slowdown from 2.1% in the first quarter.

Consumer spending, the biggest driver of GDP, accelerated to 2.3% from 2.0% in Q1. Households kept spending even as the Federal Reserve held interest rates at their highest level in two decades. The weakness in the headline GDP number came from a drop in government spending and slower business investment, not from private demand.

Consumer Spending Accelerated to 2.3% in Q2

“The consumer is still carrying the economy,” said James Bullard, former St. Louis Fed president. “The details show the slowdown is concentrated in the public sector, not in the private side.”

The strength in consumption suggests the Fed’s rate hikes have not yet crushed demand. The central bank has held its benchmark rate at 5.25%–5.50% since July 2023. Chair Kevin Warsh said after the July 28 FOMC decision that the Fed needed more evidence inflation was returning to 2% before cutting.

Dallas Fed Trimmed Mean PCE Slowed to 1.5%

Inflation data released alongside the GDP report offered a more encouraging picture. The Dallas Fed’s Trimmed Mean PCE, which strips out the largest monthly price moves in both directions, rose at a 1.5% annualized rate in May. That was down from 2.1% in April and the lowest reading since early 2021.

The traditional Core PCE measure, which the Fed targets, advanced 2.6% year-over-year in May. The Trimmed Mean version is considered a cleaner gauge of underlying price trends because it discards outliers. The sharp deceleration suggests broad-based price pressures are easing faster than the headline inflation numbers show.

“The Trimmed Mean is telling us that the stickiness in inflation is concentrated in a few categories, not spreading across the economy,” said Sarah House, senior economist at Wells Fargo. “That supports the case for a rate cut later this year.”

Weekly jobless claims, also released Thursday, held near historic lows. Initial claims came in at 233,000, below the 240,000 consensus. The four-week moving average rose to 237,000, still well under the 300,000 threshold that economists associate with a weakening labor market.

Treasury Yields Rose, Stocks Gained

Treasury yields moved higher as traders continued to sell government debt after the FOMC decision and Warsh’s comments. The 10-year yield rose 6 basis points to 4.28%. The selling was concentrated at the long end, pushing the 2-year to 10-year spread wider by 4 basis points to negative 18 basis points.

The yield move reflected a concern that inflation may prove more persistent than the GDP slowdown alone would suggest. But the stock market took a different signal. The S&P 500 rose 1.2%, the Nasdaq gained 1.5%, and the Dow added 0.8%. Investors focused on the consumer spending strength and the cooling inflation measures.

The data sets up a contrast for the Fed. Growth is slowing but consumer demand is holding. Inflation is improving but remains above target. The next major data point is the July employment report due Aug. 1. Economists expect payrolls to rise by 190,000.