US economy slows to 1.5% annual growth in second quarter

Eurozone outpaces US with 1.8% annualized expansion

The Commerce Department said Thursday that the US gross domestic product decelerated from the 2.1% annual rate recorded in the first three months of 2026 and fell short of the roughly 2% consensus economists had expected. The slowdown was driven by lower government spending, investment and exports, which offset a pickup in consumer activity.

Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 3.2% annual rate in the second quarter, the department said, rebounding after slowing to 0.5% in the first quarter. Americans spent on motor vehicles — particularly light-duty trucks — furniture and prescription drugs, according to surveys cited by the Commerce Department, despite consumer prices rising 3.5% in the year to June.

The Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation gauge, rose 3.7% in June from a year earlier, down from a 4.1% annual increase in May, the Commerce Department also reported Thursday. Core PCE, which excludes volatile food and energy prices, rose 3.3% from a year ago, little changed from 3.4% in May.

Prices have remained above the Fed’s 2% target for more than five years, and the conflict with Iran has pushed energy costs higher. Brent crude, the global oil benchmark, traded at about $90 a barrel on Thursday, the BBC reported, with average US gasoline prices back above $4 a gallon.

The Federal Reserve held its benchmark interest rate steady for a fifth consecutive meeting on Wednesday. Three regional Fed presidents dissented from the decision, saying they wanted to raise rates to combat elevated inflation — the first time in a decade that so many Fed officials had dissented in the same direction on a policy vote, according to The Guardian.

Fed Chair Kevin Warsh said the central bank had no “magic wand” to tackle rising prices, according to the BBC. The Fed said in its statement that US economic activity was expanding at a “solid pace despite uncertainty caused by the conflict in the Middle East.”

Michael Pearce, chief US economist at Oxford Economics, said the growth figure underplayed the “strength” of the US economy and predicted the pace would return to above 2% later this year. Bradley Saunders, North America economist for Capital Economics, told the BBC the GDP reading “seriously undersells a healthy economy,” noting that households had “shrugged off” the hit to budgets from higher fuel prices.

The job market also showed growth. Employers added an average of 92,000 jobs a month through the first half of the year, compared with fewer than 10,000 a month in 2025 when high interest rates and tariffs discouraged hiring, The Guardian reported, citing Commerce Department data.

The eurozone grew 0.4% in the second quarter from the prior three months, the European Union’s statistics agency reported Thursday, for an annualized rate of 1.8% — outpacing the US for the first time since the fourth quarter of 2025. The Wall Street Journal reported the figure beat the 0.2% growth consensus from a poll of economists.

Growth in the currency bloc was supported by easing inflation, resilient manufacturing, and a 3.9% quarterly rebound in Ireland driven by AI-related services exports, according to the Journal. The German economy grew 0.2%, France expanded 0.2% after contracting 0.1% in Q1, and Spain grew 0.7%.

Still, the eurozone faces risks from the Middle East conflict, wildfires during a record-breaking European heatwave, and potential interest rate increases from the European Central Bank, the Journal reported. The ECB held its key rate at 2.25% last week after a hike in June.

“There were signs that investment in industries away from the AI boom was ‘reviving,’” Pearce said, according to the BBC, adding that “surging AI-related investment is still the biggest game in town.”

Higher costs have become a source of voter frustration ahead of the November midterm elections. Two-thirds of Americans, including 49% of Republicans, said they have little faith the federal government will address high prices, according to a Harris Poll survey cited by The Guardian.