The U.S. economy expanded at a weaker-than-expected 1.5% annualized rate in the second quarter, even as consumer spending accelerated and underlying inflation remained well above the Federal Reserve's 2% target. The Commerce Department data added to an uneven economic picture confronting Fed Chair Kevin Warsh, whose central bank held interest rates steady at 3.5% to 3.75% while acknowledging continued uncertainty tied partly to the conflict in the Middle East.
The second-quarter growth figure fell short of the 2.1% median forecast among economists surveyed by Reuters. Estimates had ranged from 0.8% to 2.9%, illustrating the difficulty of measuring an economy being pulled in different directions by resilient household demand, trade fluctuations, elevated borrowing costs and persistent inflation.
Some forecasters lowered their projections shortly before the gross domestic product release after June's advance economic indicators showed a modest narrowing in the goods trade deficit. Because the Reuters survey was largely completed before those figures became available, the consensus estimate didn't fully capture the later revisions.
Consumer spending provided the clearest source of strength. The category, which accounts for more than two-thirds of U.S. economic activity, rose at a 3.2% rate during the quarter after increasing just 0.5% in the first three months of the year.
Tax refunds helped support household demand, while higher-income consumers continued to spend despite elevated interest rates and broader uncertainty. The rebound suggested that domestic consumption remains an important buffer against weakness elsewhere in the economy, though the benefits appear unevenly distributed across income groups.
Inflation data released alongside the growth figures showed some monthly easing but little evidence that underlying price pressures have returned to the Federal Reserve's target. The personal-consumption expenditures price index fell a seasonally adjusted 0.1% in June, matching economists' expectations.
Core PCE, which excludes food and energy, increased 0.1% for the month, a smaller rise than forecast. On an annual basis, however, the core measure stood at 3.3%, leaving inflation substantially above the Fed's preferred 2% level and limiting the central bank's room to reduce borrowing costs quickly.
Federal Reserve officials voted Wednesday to leave the benchmark federal-funds rate unchanged. In their postmeeting statement, policymakers said "economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East."
Officials also said job growth has "kept pace with the workforce and the unemployment rate has changed little." The language indicated that the central bank still views labor-market conditions as relatively stable, even as slower-than-expected GDP growth and persistent inflation complicate the policy outlook.
