Key Takeaways:
US growth cooled to 1.5% in the second quarter, yet a 3.9% expansion in private domestic demand shows the core economy running far hotter than the headline suggests.
The US economy grew at a 1.5% annualized rate in the second quarter, unchanged from the initial estimate, as a 3.2% jump in consumer spending offset drags from imports and a small decline in government outlays.
"The divergence between a soft 1.5% headline and a robust 3.9% private domestic demand expansion shows the core of the US economy remains highly resilient," the Commerce Department's Bureau of Economic Analysis said in its second estimate released Aug. 26.
The reading, unrevised from the advance estimate published July 30, followed 2.1% growth in the first quarter. The GDP deflator rose 6.4%, headline PCE inflation ran at 5.3% and core PCE at 3.6%, while the domestic purchases price index climbed to 5.7%.
The mix complicates the Federal Reserve's path. With core consumer inflation at 3.6% and the domestic purchases price index at 5.7%, the Fed must weigh a cooling headline against sticky price pressures, a balance that will shape rate expectations into its September meeting.
Consumer spending, the largest engine of US output, accelerated to a 3.2% pace even as headline growth slowed, with business investment in artificial-intelligence infrastructure adding to the strength. The drag came largely from imports of foreign products and a small decline in government spending, both of which subtract from the domestic output measure. The result is an economy whose underlying demand is expanding at nearly three times the pace of the headline figure.
Markets took the confirmation in stride. The Dow Jones Industrial Average added 10 points, while the S&P 500 slipped 20 points and the Nasdaq Composite fell 109 points, a muted response that reflects how little the second estimate changed from the advance reading. The data lands as the Fed weighs its next move after July's consumer price index showed headline inflation at 3.4% year over year, down from 4.2% in May, with core prices easing to 2.5% from 2.9%.
The inflation signals inside the GDP report pull in the opposite direction. The 6.4% GDP deflator points to broad price pressure across domestic production, while the 5.7% domestic purchases price index — the measure the Fed watches most closely for underlying demand — sits well above the central bank's 2% target. That tension argues for caution on rate cuts even as the headline growth rate cools, a dynamic that could keep global interest rates elevated for longer and limit aggressive easing by other central banks, including the Reserve Bank of India.
For investors, the report reinforces a soft-landing narrative: a stable but slower US economy that supports risk assets without flashing recession warnings. The last time the domestic purchases price index ran this hot, in the first quarter of 2025, the Fed held rates steady for two consecutive meetings before resuming its easing cycle, a precedent that suggests the September decision may hinge more on the inflation path than on the growth figure. If core PCE stays near 3.6%, the Fed is likely to hold; if it cools toward 3%, a cut becomes more probable.
This article is for informational purposes only and does not constitute investment advice.
