U.S. economic growth slowed and fell short of expectations in the second quarter. What's next?

According to preliminary estimates of U.S. gross domestic product (GDP), the U.S. economy grew by 1.5% on an annualized basis in the second quarter, according to data from the U.S. Bureau of Economic Analysis (BEA). This is significantly lower than the first-quarter figure of 2.1% and falls short of economists’ expectations, who had anticipated a growth rate of 2.3%.

The BEA also reported the core Personal Consumption Expenditures (PCE) price index—the Fed’s preferred measure of inflation, which excludes volatile food and energy prices— — which rose 3.3% year-over-year in June. The figure is in line with economists’ expectations, according to Barron’s, and slightly below May’s growth rate of 3.4%.

On a monthly basis, core PCE rose 0.1% in June (economists had expected 0.2%), which was slightly less than the 0.3% increase in May. The overall Personal Consumption Expenditures (PCE) price index rose 3.7% year-over-year last month (the consensus forecast was 3.6%) and decreased by 0.1% on a monthly basis, which also indicates a slowdown compared to May’s figures: at that time, the total PCE rose 4.1% year-over-year and increased 0.4% on a monthly basis.

In recent days, the resumption of hostilities with Iran has once again raised concerns about a possible rise in oil prices and further disruptions to supply chains, which could lead to rising inflation in the coming months and a slowdown in GDP growth, according to Barron’s. According to estimates by Jason Pride, head of investment strategy and research at Glenmede, geopolitical tensions, as well as the possible closure of the Bab el-Mandeb Strait to shipping (which the Iran-backed Yemeni Houthis have threatened to block) could slow U.S. GDP growth by 0.4% and push inflation up by 0.7%.

In the second quarter, a significant portion of GDP growth was driven by business investment in artificial intelligence, Barron's reports. Growth was also likely supported by consumer spending among both high-income households and middle-income families—which remained stable over the past three months, according todata from Bank of America. They showed particularly strong growth in the second quarter of 2026 in spending on airline tickets and jewelry.

The PCE index, in turn, remains a key inflation indicator to watch in the context of the Fed’s discussion on achieving its goals, confirmed Kevin Warsh, who took office as chairman of the U.S. central bank a couple of months ago, however, his response contained several caveats, Barron’s notes. “I’m concerned about what the PCE numbers show. I’m concerned about the contribution from the CPI [Consumer Price Index] and everything else, but my perspective is broader,” he remarked.

On the eve of the Fed meeting, despite the fact that U.S. inflation remains above the central bank’s 2% annual target, the Fed left the federal funds rate unchanged for the fifth consecutive time at 3.5–3.75%. Three of the 12 voting members of the Fed’s meeting voted to raise the rate by 0.25 percentage points—more than expected. Following the announcement, the yield on 30-year U.S. Treasury bonds briefly jumped to 5.244%—the highest level since July 2007.

According to data from the CME’s FedWatch tool, prior to the release of macroeconomic data, markets were pricing in a 63.2% probability of a rate hike at the next Fed meeting in September; but following the release of the BEA’s inflation and GDP data, that probability fell to 59.2%.

This article was AI-translated and verified by a human editor