U.S. economy slowed in second quarter, but consumers continue to spend

Key Points:

• The U.S. GDP grew at an annual rate of 1.5% in the second quarter, below economists' expectations of 2.1%, reflecting the economic impact of the Iran war and rising energy costs.
• Higher oil prices, driven by Middle East conflicts, pushed U.S. gasoline prices from $2.98 to over $4 per gallon, squeezing real incomes and potentially dampening consumer spending in the latter half of the year.
• Despite inflationary pressures, consumer spending remained robust in Q2, supported by a strong labor market, tax refunds, equity market gains, and increased investment in artificial intelligence.
• Inflation slowed in June with the Personal Consumption Expenditures (PCE) index rising 3.7% annually, aligning with forecasts and easing pressure on the Federal Reserve to raise interest rates immediately.
• The Federal Reserve remains divided on interest rate policy, with some members favoring hikes despite recent data, while forecasts suggest core inflation will stay elevated through 2023, only easing sustainably next year.