US economy grows at a sluggish 1.5% in second-quarter with inflation
remaining stubbornly high
[July 31, 2026] By
PAUL WISEMAN
WASHINGTON (AP) — The U.S. economy expanded at a sluggish 1.5% pace from
April through June as rising imports weighed on growth, yet consumers
continued to spend. And the Federal Reserve’s favored measure of
inflation grew more slowly last month. But it remained above the central
bank’s 2% target at a time when Americans are frustrated about the high
cost of living ahead of the midterm elections, now less than 100 days
away.
Growth in U.S. gross domestic product — the nation’s output of goods and
services — decelerated from 2.1% in the first three months of 2026, the
Commerce Department reported Thursday, coming in below economists'
expectations. But consumer spending — which accounts for about 70% of
U.S. economic activity — increased at a 3.2% annual clip, up from 0.5%
in the January-March period.
A measure of the economy’s underlying strength – which strips out
volatile government spending and trade numbers – looked good, expanding
at a 3.9% annual pace, up from 1.7% from January through March.
Business investment, excluding housing, rose at an 8.4% pace, down from
10.6% from January through March but strong, reflecting a surge in
investment in artificial intelligence.
Imports are subtracted from the economic figures because GDP is only
supposed to count what is produced in the United States. Imports rose at
an 11.5% pace, partly on a surge in shipments of computer chips and
other products that support AI investment. The imports shaved 1.5
percentage off second-quarter GDP growth.
"The consumer rescued the quarter,'' said Olu Sonola, head of U.S.
economics at Fitch Ratings. “AI investment remains a powerful growth
story, but the import surge underpinning the buildout is a reminder that
an AI boom does not automatically translate into an equally large boost
to U.S. GDP.”
The Commerce Department also said Thursday that its personal consumption
expenditures (PCE) price index, the one favored by the Fed, rose 3.7%
last month from June 2025 , down from a 4.1% year-over-year increase in
May. Excluding volatile food and energy prices, so-called core consumer
prices were up 3.3% from a year earlier, little-changed from 3.4%
increase in May. Prices actually fell 0.1% from May to June on a 9.2%
drop in the price of gasoline and other energy products.
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Gas prices are displayed at a Sinclair gas station along Interstate
70, Thursday, July 23, 2026, in Golden, Colo. (AP Photo/David
Zalubowski)
 The PCE prices were about in line
with economists' expectations. But the year-over-year increase in
prices has been stuck above the Fed's 2% target for more than five
years, and some Fed officials are getting impatient with progress
against inflation.
The Fed on Wednesday chose to leave its benchmark interest rate
unchanged for the fifth straight meeting. But three regional Fed
presidents dissented, saying they wanted to raise rates to combat
elevated inflation.
The American economy has been surprisingly resilient in the face of
the Iran war and the spike in energy prices it caused. The job
market has bounced back this year from a lackluster 2025, giving
consumers the wherewithal to spend. Employers are adding an average
92,000 jobs a month this year, compared with fewer than 10,000 a
month in 2025 when high interest rates and President Donald Trump’s
erratic use of tariffs discouraged businesses from hiring.
Higher costs have frustrated Americans ahead of November’s midterm
elections, which will determine whether President Donald Trump’s
Republicans keep full control of Congress
A new AP-NORC poll found that the public is souring on the Iran war.
And about 7 in 10 U.S. adults — 72% — say it’s “extremely” or “very”
important for the U.S. to prevent domestic oil and gas prices from
rising, up from 67% in March.
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