Economic growth falls short of experts’ expectations, but inflation improves

The U.S. economy slowed to a 1.5% pace from April through June, as increases in consumer and business spending were partially offset by a drop in government outlays, the Commerce Department said Thursday.

Larger-than-usual income tax refunds helped Americans keep spending in the second quarter, while soccer’s quadrennial World Cup tournament gave them — and visitors from abroad — a good reason to do so, economists said.

Growth overall came in below economists’ expectations, which were at roughly 2%.

“It’s an economy that’s doing OK. It’s not overheating. It’s not underheating,” said Brian Bethune, an economics professor at Boston College.

Other indicators suggest the economy remains solid. Real final sales to private domestic purchasers — a combined measure of consumer spending and business investment — rose by 3.9% in the period. That was up from 1.7% in the first three months of the year.

“The second-quarter GDP figure seriously undersells a healthy economy,” economist Bradley Saunders of Capital Economics wrote in a client note.

The net effects of trade subtracted from growth, as a surge in imports swamped an increase in exports. Many of the shipping containers arriving at U.S. ports in recent months were filled with foreign capital goods, such as machinery, computers, and telecommunications gear, needed for the build-out of artificial intelligence facilities, according to Oliver Allen, senior U.S. economist for Pantheon Macroeconomics.

“Much of the recent strength in AI-related [capital expenditures] is bleeding out into spending on tech imports, rather than supporting the domestic economy,” he told investors.

A separate government report provided good news on the inflation front, though economists say the respite may prove short-lived. Prices rose in June at an annual rate of 3.7%, an improvement from the previous month. Excluding volatile food and energy costs, the inflation rate was 3.3%, according to the Federal Reserve’s preferred gauge.

A ceasefire between the United States and Iran helped reduce gasoline prices, which averaged $4.30 on June 1, by nearly 50 cents a gallon. But the resumption of fighting caused prices to bounce off those recent lows, reaching $4.10 per gallon on July 27, according to the U.S. Energy Information Administration.

“The renewed rise in energy prices means households must again deal with higher prices at the gas pump,” said Kathy Bostjancic, chief economist for Nationwide, who expects the Fed to face pressure to raise interest rates in the coming months.

The new data does not reflect the impact of President Donald Trump’s decision earlier this month to resume bombing Iran or his imposition last week of tariffs on more than 80 U.S. trading partners.

Persistent inflation, meanwhile, led to a split Wednesday among members of the Federal Reserve’s policymaking board. By a vote of 9-3, the Fed’s Open Market Committee opted to hold short-term interest rates steady between 3.5 % and 3.75%.

Inflation has now been higher than the Fed’s 2% price-stability target for more than five years. U.S. stocks slid Wednesday, while Treasury yields soared, a sign that investors are growing anxious about the Fed’s willingness to combat inflation.

Voter unhappiness with the economy looms as a major threat to Republican hopes of retaining control of Congress in November’s midterm elections. In a Quinnipiac University poll released Wednesday, just 34% of voters said they approved of Trump’s handling of the economy while 62% disapproved. And 59% of those surveyed said the economy is getting worse; 19% said it was improving.

Some of the forces that buttressed growth in recent months are almost tapped out, meaning the economy may slow, Bethune said.

Thanks to the president’s signature tax bill, individual refunds were more than 11 percent larger this year than in previous years, according to the IRS. But most refunds have now been dispatched.

Plus, the World Cup ended on July 19, meaning that international soccer fans have returned home, and Americans who splurged on the special event may tighten their belts.