Consumer spending supports growth despite trade pressures
The U.S. economy expanded at a slower pace in the second quarter of 2026, growing 1.5% from April through June as higher imports weighed on overall growth. However, strong consumer spending and continued business investment helped support economic activity.
The Commerce Department reported that gross domestic product (GDP) growth slowed from 2.1% in the first quarter, falling below economists’ expectations. Consumer spending, which represents around 70% of U.S. economic activity, increased at an annual rate of 3.2%, a significant improvement from the 0.5% growth recorded in the previous quarter.
A measure of underlying economic strength that excludes volatile government spending and trade activity showed stronger momentum, expanding at an annual rate of 3.9%, compared with 1.7% in the first quarter.
AI investment boosts business spending
Business investment remained a key driver of economic growth, with non-residential investment increasing at an 8.4% annual pace. Although this was slower than the 10.6% growth recorded in the first quarter, economists noted that spending continued to benefit from major investments in artificial intelligence infrastructure.
Imports increased 11.5% during the quarter, partly due to higher shipments of computer chips and other technology products needed for AI development. Because imports are deducted from GDP calculations, the increase reduced second-quarter growth by 1.5 percentage points.
According to Olu Sonola, head of U.S. economics at Fitch Ratings, consumer spending helped offset the impact of rising imports. He noted that while AI investment remains a major growth opportunity, increased imports supporting the AI expansion do not automatically translate into equivalent GDP growth.
Inflation slows but remains above Fed target
The Federal Reserve’s preferred inflation measure showed some improvement in June, but price growth remained above the central bank’s 2% target.
The personal consumption expenditures (PCE) price index increased 3.7% compared with June 2025, slowing from the 4.1% annual increase recorded in May.
Core PCE inflation, which excludes volatile food and energy costs, rose 3.3% year over year, slightly below the previous month’s 3.4% increase.
Monthly prices declined 0.1% from May to June, helped by a 9.2% drop in gasoline and other energy prices. However, inflation has remained above the Federal Reserve’s target for more than five years, increasing pressure on policymakers to achieve further progress.
Federal Reserve faces pressure over interest rates
The Federal Reserve decided to keep its benchmark interest rate unchanged for the fifth consecutive meeting on Wednesday. However, three regional Fed presidents dissented, arguing that higher rates were needed to address persistent inflation concerns.
The debate highlights the challenge facing policymakers as they balance slowing inflation with maintaining economic growth.
Labor market recovery supports consumers
The U.S. economy has shown resilience despite uncertainty from the Iran conflict and higher energy prices. A stronger labor market has helped support consumer spending, with employers adding an average of 92,000 jobs per month in 2026.
This marks a significant improvement from 2025, when employers added fewer than 10,000 jobs per month amid high interest rates and uncertainty surrounding trade policies.
Americans remain concerned about costs ahead of elections
Despite economic resilience, many Americans continue to feel pressure from higher living costs ahead of the November midterm elections.
A recent AP-NORC poll showed growing concern about energy prices, with 72% of U.S. adults saying preventing increases in domestic oil and gas prices is extremely or very important, up from 67% in March.
The results reflect ongoing public concerns about inflation, energy costs and the broader economic impact of geopolitical conflicts.
