U.S. growth slows as inflation eases but stays high

The U.S. economy slowed sharply in the spring, expanding at a 1.5% annual rate as the Iran war, higher energy prices and rising imports weighed on growth, the Commerce Department reported Thursday.

The April-to-June figure for gross domestic product, the broadest measure of the nation’s output of goods and services, fell short of economists’ expectations. Economists polled by Reuters had forecast a 2.1% annualized gain. The economy grew at a 2.1% annual rate in the first quarter.

The report was the first of three Commerce Department estimates of second-quarter growth. It showed an economy still moving forward, but at a slower pace, as businesses and households absorbed higher costs tied to the conflict in the Middle East. The war has disrupted shipping in the Strait of Hormuz and pushed up global energy costs. U.S. gasoline prices rose from an average of $2.98 a gallon just before the war began in late February to well over $4 in the second quarter.

“With gas prices rising again, the squeeze on real incomes will put renewed pressure on consumer spending in the second half of the year,” Oxford Economics said in a report.

Despite the strain, consumer spending remained solid, the Bureau of Economic Analysis said. Analysts cited several supports for households, including a stronger labor market, tax refunds and reductions, stock market gains and lower savings.

“Consumers benefited from a healthy labor market, tax refunds and reductions, positive wealth effects from the equity market, and any shortfall after that due to higher energy prices was bridged by a pullback in savings,” Nationwide Chief Economist Kathy Bostjancic said in a report.

Thomas Ryan, senior North America economist at Capital Economics, said households have largely weathered the shock of higher gasoline prices. “Even so, it remains unclear whether they can absorb another hit now that retail gasoline prices have risen back above $4 a gallon,” he wrote in a note to investors.

The Guardian reported that the job market has improved this year after a weak 2025, giving consumers more ability to keep spending. Employers are adding an average of 92,000 jobs a month this year, compared with fewer than 10,000 a month in 2025, when high interest rates and Donald Trump’s erratic use of tariffs discouraged businesses from hiring.

Investment in artificial intelligence also helped support growth, according to Oxford Economics.

A separate Commerce Department report Thursday showed the Federal Reserve’s preferred inflation gauge easing in June, though it remained well above the central bank’s 2% target. The Personal Consumption Expenditures price index rose 3.7% from a year earlier, down from 4.1% in May and in line with economists’ forecasts. Core PCE, which excludes volatile food and energy prices, rose 3.3%, little changed from 3.4% in May.

The Fed on Wednesday left its benchmark interest rate unchanged for the fifth straight meeting. Three regional Fed presidents dissented, saying they wanted to raise rates to fight elevated inflation.

“The weaker-than-expected GDP numbers this morning could be cause for concern that the economy is slowing too quickly,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in an email. “On the other hand, the lower PCE readings should give the Fed some more room to be patient and not raise interest rates prematurely.”

Fed Chairman Kevin Warsh said Wednesday that bringing inflation back to target would take time. “We understand that the five-plus years of inflation above target cannot be cured in nine weeks, or by a single month of modest price decreases,” he told reporters.

Oxford Economics expects core inflation to remain elevated and end the year at 3.1%. “It won’t be until next year that core inflation heads sustainably lower,” the firm said.