U.S. Growth Slows to 1.5% as the Iran War Pushes Gas Past $4 and Inflation Back Up

The U.S. economy grew at a 1.5% annual rate in the second quarter, the Commerce Department said Thursday, a marked slowdown from the 2.1% pace of the first quarter and well below the 2.1% economists polled by LSEG had penciled in.

The advance estimate from the Bureau of Economic Analysis described an economy pulling in two directions. Consumer spending accelerated to a 3.2% clip, and business investment rose sharply, driven by spending on information-processing equipment and software tied to artificial intelligence buildouts. Those gains were offset by a decline in government spending, a drop in private inventory investment and a rise in imports, which subtract from the headline figure.

Inflation is the number that worried economists most. The price index for gross domestic purchases climbed 5.7% in the quarter, compared with 3.6% in the first. The personal consumption expenditures index, the Federal Reserve's preferred gauge, ran at a 3.7% annual rate in June, with the core measure that strips out food and energy at 3.3% — a slight cooling from May, but nowhere near the central bank's 2% target. The Fed held rates steady at its most recent meeting, with three of its 12 voting members favoring an increase, an unusually visible split.

Much of the price pressure traces directly to the war with Iran and the disruption of shipping through the Strait of Hormuz. Gasoline averaged $2.98 a gallon in late February, before the fighting started. It has since climbed above $4.00. "With gas prices rising again, the squeeze on real income" will weigh on households, Oxford Economics wrote. Thomas Ryan of Capital Economics said consumers have absorbed a great deal already, and that "it remains unclear whether they can absorb another hit." Kathy Bostjancic of Nationwide noted that the quarter's spending strength was "bridged by a pullback in savings" rather than by rising incomes.

Not everyone read the report as a warning. Michael Pearce of Oxford Economics argued the 1.5% figure "underplays the economy's strength," pointing to the temporary drag from imports and inventories and forecasting growth above 2% in the second half. Gregory Daco of EY-Parthenon credited consumer spending and the surge in AI-linked equipment investment for keeping the expansion alive, while warning that "a prolonged escalation of the Middle East conflict" could lift inflation enough to force the Fed's hand.

The advance estimate is the first of three readings. A revision arrives in late August and a third estimate in September, and early GDP figures are often moved substantially by later trade and inventory data. For now the picture is a familiar and uncomfortable one: an economy still growing, households still spending, and prices rising faster than paychecks.