US GDP Slows to 1.5%, Core Inflation Eases to 3.4%

The U.S. economy grew at a 1.5% annualized rate in the second quarter, down from 2.1% in the first three months of the year, the Bureau of Economic Analysis reported Thursday. The advance estimate undershot the 2.0% that economists in a Bloomberg survey had penciled in, reflecting a sharp pullback in government spending and a wider trade deficit.

Consumer spending and investment both accelerated. Personal consumption expenditures rose at a 3.9% pace, up from 1.7% in Q1, as Americans kept buying cars, dining out and traveling. Gross private fixed investment also picked up. Government spending fell, led by a drop in federal outlays. Exports rose, but imports jumped more, subtracting from the headline number.

The deceleration in overall GDP was driven by the government sector and a slowdown in exports and investment, partly offset by the consumer strength. Real final sales to private domestic purchasers – a measure that strips out government, trade and inventories – climbed 3.9%, a solid reading that suggests underlying demand held up.

On the inflation front, the personal consumption expenditures price index rose 5.1% from a year ago, up from 4.6% in Q1. The core measure, which excludes food and energy, slowed to 3.4% from 4.4%. That is the lowest reading since early 2021 and will be closely watched by Federal Reserve officials who have said they need to see sustained progress on prices before cutting rates.

The mix of slower growth and cooling core inflation gives the Fed room to hold its policy rate steady at the July 30-31 meeting. Chair Jerome Powell has emphasized that the central bank is not yet confident inflation is on a sustainable path to 2%, the Q2 data moves in that direction. The GDP price index for gross domestic purchases, a broader measure, accelerated to 5.7% from 3.6%, reflecting higher costs for services and energy.

The advance estimate is based on incomplete source data and will be revised twice more. The second estimate, incorporating more complete monthly data, is scheduled for release on August 26, along with the first look at corporate profits for the quarter.

For a broader view of how these macro signals are feeding into asset prices, see AlphaScala's ongoing market analysis.

The bond market took the data in stride. The 10-year Treasury yield edged up 2 basis points to 4.28%, while the 2-year yield slipped 1 basis point to 4.72%. The dollar index traded flat near 104.50. S&P 500 futures held steady, with the index on track for a modest open.

The core PCE print of 3.4% is now the lowest since February 2021, when it stood at 1.9%. Critics of the Fed's current stance point to that as evidence the tightening cycle has done its work. The central bank's preferred inflation gauge has been above 3% for 28 consecutive months.

Consumer spending contributed 2.6 percentage points to the Q2 GDP print, the strongest contribution since Q4 2023. That resilience has puzzled some economists, given elevated credit card debt and dwindling pandemic-era savings. The personal saving rate fell to 3.2% in Q2, down from 4.1% in Q1, suggesting households are dipping into savings to maintain spending.

Investment added 0.7 percentage point, led by equipment spending. Nonresidential structures investment fell for the first time in six quarters, a potential sign that the boom in factory construction tied to the CHIPS Act and Inflation Reduction Act is leveling off. Government spending subtracted 0.3 percentage point, the first negative contribution from the sector since Q3 2024.

The trade deficit widened as imports surged 4.2% in Q2, the fastest pace in two years. Exports rose 1.8%. The net trade drag of 0.5 percentage point was the largest since Q4 2022. Some of the import strength may reflect businesses front-loading orders ahead of potential tariff hikes, trade economists said.

Inventory investment added 0.2 percentage point after subtracting 0.4 percentage point in Q1. The swing was smaller than some analysts had expected, given anecdotal reports of stockpiling. The BEA's third estimate on August 26 will include a full accounting of inventory contributions.

The GDP price index for gross domestic purchases accelerated to 5.7% from 3.6%, driven by a 6.8% jump in services prices. That divergence between the headline GDP deflator and the core PCE measure will be a point of debate at the Fed. The former captures a broader basket including government consumption and investment, while the latter is the Fed's target.

The advance estimate is based on roughly 60% of the source data, the BEA said. Revisions have averaged 0.3 percentage point between the advance and second estimates over the past five years. The August 26 release will also include the first official corporate profits data for Q2, which will show how margins held up as input costs rose.

For gold, the slower growth and cooling core inflation picture is a mixed signal. Lower real yields are supportive, but a still-tight labor market and elevated services inflation keep the Fed on hold. See the gold profile for the full positioning picture.

The July FOMC meeting is now 12 days away. Market pricing implies a 96% probability of no move, according to CME FedWatch. The first fully priced cut is September, with a 68% chance of a quarter-point reduction.