Economic Growth Slowed Even as Consumers Kept Spending
The Bureau of Economic Analysis reported that personal income increased 0.2% in June, matching expectations, while consumer spending rose 0.3%. The Personal Consumption Expenditures (PCE) Price Index declined 0.1% during the month, while Core PCE, which excludes the often-volatile food and energy categories, increased 0.1%, below expectations for a 0.2% increase. The second estimate of second-quarter GDP showed the economy expanded at an annualized rate of 1.5%, below economists' expectations for 2.0%, even as consumer spending accelerated to a stronger-than-expected 3.2% annualized pace.
The PCE report is one of the Federal Reserve's primary gauges of inflation because it measures not only how prices are changing, but also how consumers adjust their spending as prices change. Unlike the Consumer Price Index (CPI), which follows a relatively fixed basket of goods and services, PCE captures changes in purchasing behavior, giving policymakers a broader view of inflation across the economy.
Economists also closely watch Core PCE because food and energy prices can fluctuate sharply from month to month due to weather, geopolitical events, and supply disruptions. Excluding those categories provides a clearer view of underlying inflation trends. Taken together, today's report was modestly encouraging. Inflation came in softer than expected while incomes continued to grow and consumers kept spending. That combination suggests inflation is moving in the right direction without a meaningful deterioration in consumer demand, giving the Federal Reserve additional evidence that price pressures continue to moderate.
Consumer spending and GDP are closely related, but they measure different things. Consumer spending accounts for roughly two-thirds of the U.S. economy, making it the largest component of GDP. Business investment, government spending, inventories, and international trade also contribute to overall growth. This quarter, strength in consumer spending was offset by weakness in other parts of the economy, including trade, resulting in slower GDP growth than economists had expected.
The overall picture remains constructive. Inflation continues to cool, consumers continue to spend, and the economy continues to grow, even if that growth has moderated. The biggest uncertainty is energy. Lower gasoline prices helped improve June's headline inflation reading, but renewed geopolitical tensions, including developments involving Iran, could reverse some of that progress if energy prices move higher in the months ahead.
US GDP better than it looks
Yes, it’s backward-looking, and the market has moved on, and this is only the first estimate.But there are some wild numbers here that need explaining
Headline GDP weaker than expected. Underlying is much stronger.
GDP 1.5% v 2.1% in 1Q26
Big bounce in Personal Consumption. 3.1% v 0.5% in 1Q26
Underlying GDP ex inventory and trade 3.1% v 2.2% in 1Q26
Super underlying GDP ex inventory, trade and Govt 3.2% v 1.4% in 1Q26 (best quarter since 1Q23) – this gives you the best idea on what the underlying economy is doing
Falling Inventories reduced GDP by -0.67%
Trade reduced GDP by -1.01%
Govt spending reduced GDP by -0.14%
Capx boom continues. Fixed investment added +1.2% to GDP