U.S. GDP grows 1.5% in Q2, missing estimates as dollar retreats

The U.S. economy grew at its slowest pace in over a year as a widening trade deficit masked the strongest consumer spending since early 2025.

The U.S. economy grew at a 1.5% annualized rate in the second quarter, missing the 2.1% consensus forecast, as a widening trade deficit offset the strongest consumer spending in over a year.

"The consumer remains the engine of this expansion, but the trade drag and geopolitical uncertainty are creating headwinds that will intensify in the second half," said James Knightley, chief international economist at ING.

Gross domestic product decelerated from 2.1% in the first quarter, the Commerce Department's Bureau of Economic Analysis said Thursday. Consumer spending, which accounts for more than two-thirds of economic activity, surged at a 3.2% rate after slowing to just 0.5% in the January-March period. The acceleration was fueled by larger tax refunds from President Donald Trump's tax overhaul, strong asset-price gains for higher-income households, and spending tied to the recently concluded FIFA World Cup tournament and midterm election campaigns.

The trade deficit widened sharply during the quarter, subtracting roughly 1.2 percentage points from GDP growth, according to economists' estimates. Business investment in equipment tied to artificial intelligence infrastructure remained robust, helping to prop up domestic demand. However, the U.S.-led conflict with Iran, now in its sixth month, poses a growing downside risk to demand and growth in the second half, economists warned.

The Federal Reserve held its benchmark overnight interest rate in a 3.50%-3.75% range at its July meeting, with three members of the policy-setting committee dissenting in favor of a quarter-point hike. The central bank described economic activity as "expanding at a solid pace despite elevated uncertainty" related to the Middle East conflict. Markets now price a roughly 45% probability of a rate increase at the September meeting, according to fed funds futures.

The dollar retreated against major currencies following the GDP release, with the ICE U.S. Dollar Index falling 0.6%. The Bank of Japan intervened to support the yen, adding further pressure on the greenback. The euro rose to $1.0920, while the dollar-yen pair fell to 152.40 after the intervention.

June's personal consumption expenditures data, released alongside the GDP report, showed the Fed's preferred inflation gauge running at 3.7% annually, with core PCE at 3.3% — both in line with analyst forecasts. Personal income fell 0.2% during the month, while inflation-adjusted consumer spending rose 0.4%. The personal saving rate stood at 2.7%, down from 3.1% in May, as households tapped savings to maintain spending levels.

Average gasoline prices have risen back above $4 a gallon amid renewed hostilities in the Middle East, squeezing household budgets. With wage growth barely keeping pace with inflation, the drawdown in savings is unlikely to continue indefinitely, economists said. Initial jobless claims rose to 197,000 in the week ending July 25, below the 200,000 estimate, suggesting the labor market remains resilient despite the growth slowdown.

The combination of slowing growth and sticky inflation presents a challenge for the Fed. If the economy continues to decelerate while price pressures persist, the central bank faces the risk of having to tighten policy into a weakening expansion — a scenario that would further pressure the dollar and risk assets in the months ahead.

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