US GDP growth slows to 1.5% in Q2, missing forecasts

The US economy expanded at a 1.5% annualized rate in the second quarter, the slowest since the 2023 contraction scare and sharply below the 2.2% economists had forecast, the Bureau of Economic Analysis reported Thursday.

"The deceleration is broader than many anticipated — consumer spending is losing steam even as the labor market softens," said James Bullard, former St. Louis Fed president and now a professor at Purdue University. "This puts the Fed in a difficult position heading into September."

The GDP print marked a sharp deceleration from the first quarter's revised 2.8% pace. Consumer spending, which accounts for roughly two-thirds of economic output, grew at a 1.8% rate, down from 3.1% in Q1. Business investment slowed to 2.1% from 4.4%, while government spending added 0.3 percentage points to the headline figure. The personal consumption expenditures price index, the Fed's preferred inflation gauge, rose at a 2.6% annualized rate, down from 3.4% in the prior quarter.

The data raises the stakes for the Federal Reserve's Sept. 16-17 meeting, where policymakers will weigh whether to begin cutting interest rates from the current 5.25%-5.50% range. Fed funds futures on Thursday priced in a 78% probability of a quarter-point cut in September, up from 62% before the release, according to CME FedWatch data.

Treasury yields tumbled as the growth miss reinforced bets on rate cuts. The two-year yield fell 11 basis points to 3.94%, while the 10-year yield dropped 8 basis points to 4.02%. The S&P 500 slid 0.9% in early trading, with cyclical sectors such as industrials and materials leading declines. The Bloomberg Dollar Spot Index weakened 0.4%, extending its monthly decline.

The last time GDP printed below 1.5% was the third quarter of 2022, when the economy grew at a 1.2% rate amid the Fed's most aggressive tightening cycle in decades. That period preceded a sustained equity market rally as inflation began to moderate — a pattern some investors see repeating if the current slowdown forces the Fed's hand.

"The growth scare is real, but it's not a recession signal yet," said Ellen Zentner, chief US economist at Morgan Stanley. "The labor market is still adding jobs, and the consumer balance sheet remains healthy. What we're seeing is a normalization after an overheated post-pandemic cycle."

Housing investment contracted for the third consecutive quarter, falling 2.4% as elevated mortgage rates above 6.5% continued to suppress activity. Inventories subtracted 0.8 percentage points from GDP, a reversal from the prior quarter when restocking added 1.2 points. Net exports were a modest positive, adding 0.2 percentage points.

Looking ahead, the Atlanta Fed's GDPNow tracker for the third quarter currently stands at 2.1%, though that estimate will be revised in coming weeks as July data flows in. The risk is tilted to the downside: if consumer spending continues to decelerate at the current pace, third-quarter growth could slip below 1%, economists at Goldman Sachs said in a note Thursday.

This article is for informational purposes only and does not constitute investment advice.