Second-quarter growth missed forecasts as core inflation stays well above the Fed's 2% target
The US economy expanded at a weaker-than-expected 1.5% annualized rate in the second quarter of 2026, the Commerce Department reported Thursday. Surge in imports and a pullback in federal spending weighed on headline growth.
Gross domestic product decelerated from 2.1% in the first quarter of 2026, falling short of the 1.8% consensus forecast from economists surveyed by Dow Jones.
The miss was largely mechanical: a 42.2% widening of the trade deficit — driven by surging imports of semiconductors and AI-related equipment — along with a 0.3% contraction in federal government spending and a 0.7% decline in inventories, all dragged on the headline figure.
Beneath the surface, domestic demand held up. Consumer spending accelerated to an annualized 3.2% rate in the second quarter, up from just 0.5% in the first quarter, the fastest pace in nearly a year.
Final sales to private domestic purchasers, a closely watched measure of underlying economic strength, surged to 3.9% from 1.7% in the prior period.
Business investment also remained robust, expanding at an 8.4% annualized rate.
Inflation stays sticky, pressuring the Fed
A separate Commerce Department report released Thursday showed the personal consumption expenditures (PCE) price index — the Federal Reserve's preferred inflation gauge — rose 3.7% year-over-year in June 2026. That's down from 4.1% in May but still well above the central bank's 2% target.
Dave Meyer, chief investment officer at BiggerPockets, says investors are recalibrating their expectations, embracing a more stable market, and continuing to pursue opportunities despite borrowing costs remaining elevated.https://t.co/z4diYEAviA
— Mortgage Professional America Magazine (@MPAMagazineUS) July 29, 2026
Core PCE, which excludes food and energy, held at 3.3% annually, barely changed from 3.4% in May.
Those readings followed the Federal Open Market Committee's 9-3 vote Wednesday to hold its benchmark rate steady in a range of 3.5%–3.75% for the fifth consecutive meeting.
Three regional presidents — Beth M. Hammack, Neel Kashkari, and Lorie K. Logan — dissented in favor of a 25-basis-point hike, citing insufficient progress on inflation. The split committee reflects a central bank increasingly pulled between slowing growth and a stubborn inflation problem that no single lever can easily fix.
The energy picture offers a partial reprieve. Energy goods and services prices fell 5.9% in June as fighting in the Middle East temporarily eased, pushing gasoline prices down 9.2%.
But Fed officials have cautioned that the relief could be short-lived, and the personal savings rate — which dropped to 2.7% in June, the lowest level in four years — suggests consumers are dipping into reserves to sustain spending.
What the GDP miss means for mortgage rates
For brokers and loan officers, the Q2 report reinforces a rate environment that has proven stubbornly resistant to change. The 30-year fixed mortgage rate averaged 6.58% in the most recent Freddie Mac survey, up from the week before but still below the 6.74% recorded at the same point in 2025.
Rate cuts, once widely anticipated for mid-2026, are now expected to remain off the table for the rest of the year.
Jay Lessard, president and senior loan officer at Sonoran Lending, told Mortgage Professional America that trajectory could still shift, but cautiously.
"If inflation continues to trend lower and the economy slows without a significant resurgence in price pressures, we could see mortgage rates ease somewhat before year-end," he said.
"On the other hand, if inflation remains stubborn or geopolitical events continue to push Treasury yields higher, rates could remain where they are or even move slightly higher."
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