Trump's War Hits America, US Economy Grows by Only 1.5%
The United States economy slowed in the second quarter of 2026 amidst inflation that remains well above the central bank’s target. This condition is expected to further narrow the room for the Federal Reserve (The Fed) to promptly cut interest rates.
Data from the US Bureau of Economic Analysis (BEA) released on Thursday local time shows that US Gross Domestic Product (GDP) grew by only 1.5% (yoy) during the April-June 2026 period. This figure is lower than the 2.1% growth recorded in the first quarter and fell below the 1.8% expectation of economists surveyed by Dow Jones.
Although growth has slowed, the weakness was primarily triggered by a decline in federal government spending and a reduction in inventories. Meanwhile, household consumption, which serves as the main engine of the US economy, actually showed signs of improvement.
Consumer spending increased by 2.1%, significantly higher than the mere 0.4% increase in the previous quarter. Additionally, core domestic demand indicators, such as final sales to private domestic buyers, surged by 3.9%, indicating that private sector activity remains quite strong.
On the other hand, private domestic investment rose by 0.5%, exports increased by 0.5%, while imports fell by 1.5%, which helped support economic growth. However, a 0.7% decline in inventories and a 0.3% contraction in federal government spending were the primary factors weighing down the overall GDP figure.
At the same time, inflation remains a major challenge for The Fed. The Personal Consumption Expenditures (PCE) Price Index, the Fed’s primary benchmark for measuring inflation, recorded a monthly decline of 0.1% in June.
However, on an annual basis, PCE inflation remains at 3.7%, far above The Fed’s 2% target. Meanwhile, core PCE, which excludes food and energy components, rose by 0.1% compared to the previous month and remained at 3.3% annually, in line with market expectations. For Fed officials, core inflation is considered more reflective of long-term price trends than headline inflation. This data was released a day after The Fed decided to maintain its benchmark interest rate in the 3.5%-3.75% range through a split 9-3 vote.
Previously, inflation had shown a downward trend in early 2026. However, a surge in energy prices following conflicts involving the US, Israel, and Iran in late February pushed inflation back up, becoming a primary concern for policymakers.
President Donald Trump’s war in Iran has increased the cost of living. US national retail petrol prices surged from approximately US$2.98 per gallon before the war to over US$4.50 per gallon at its peak in May 2026.
Nevertheless, energy price pressures began to ease in June. Energy goods and services prices fell by 5.9%, driven by a 9.2% drop in petrol prices as Middle East tensions subsided.
Housing inflation also slowed to just 0.2%. Overall goods prices fell by 0.6%, and services prices rose by only 0.1%.
From the household perspective, consumer spending remained resilient with an increase of 0.3% in June. However, personal income only grew by 0.2%, lower than the 0.3% forecast.
A point of concern is that the US public is beginning to rely on savings to maintain consumption. The personal savings rate fell to 2.7%, the lowest level in four years, indicating that pressure on purchasing power is beginning to increase despite relatively strong consumption.