Sluggish Economic Growth Amid Rising Imports and Persistent Inflation

The U.S. economy expanded at a modest rate of 1.5% from April to June. Rising imports affected growth. However, consumer spending continued to play a significant role in sustaining the economy. The Federal Reserve’s preferred inflation gauge showed a slower increase last month, yet it remained above the 2% target. This high cost of living is a concern for Americans as the midterm elections approach in less than 100 days.

According to the Commerce Department, the gross domestic product (GDP) decelerated from a 2.1% growth in the first quarter of 2026 to 1.5% in the second quarter. This growth fell short of economists’ expectations. Yet, consumer spending, accounting for about 70% of economic activity, rose at a 3.2% annual pace, a significant increase from 0.5% in the first quarter.

A measure indicating the economy’s core strength, excluding government spending and trade variables, rose 3.9% annually from 1.7% earlier in the year. Business investment, excluding housing, increased at an 8.4% pace, slightly lower than 10.6% earlier, but remained strong due to a rise in AI investments. Imports increased at an 11.5% pace, mostly due to imported computer chips and other AI-related products, reducing GDP growth by 1.5% in the second quarter.

“The consumer rescued the quarter,” stated Olu Sonola, head of U.S. economics at Fitch Ratings. It highlights that AI investment is a growth area but may not substantially boost U.S. GDP due to increased imports.

The Commerce Department reported that in June, the personal consumption expenditures (PCE) price index rose 3.7% from the previous year, a decrease from the 4.1% increase in May. Core consumer prices, excluding food and energy, rose 3.3%. Prices decreased 0.1% from May to June, driven by a 9.2% drop in gasoline and energy prices. Despite expectations, the year-over-year inflation rate remains above the Fed’s target for over five years, causing some Fed officials to express impatience with the slow progress.

The Fed held its benchmark interest rate steady for the fifth consecutive meeting. Yet, three regional Fed presidents disagreed, urging a rate hike to address ongoing inflation.

The U.S. economy has shown resilience despite the Iran conflict and related energy price hikes. The job market recovered from a weak 2025, allowing consumer spending to bounce back. Employers added an average of 92,000 jobs monthly this year, compared to less than 10,000 a month in 2025 under high interest rates and tariff policies.

Americans express frustration over rising costs ahead of November’s midterms, where control of Congress is at stake. A new AP-NORC poll reveals that 72% of adults view preventing domestic oil and gas price hikes as crucial, increasing from 67% in March.