US Q2 Growth Falls Short of Expectations: Government Spending Constraints

The US economy grew by 1.5% year-over-year in the second quarter of 2026, missing market expectations of 2.1% and showing a notable slowdown from the 2.1% growth recorded in Q1. The quarterly expansion was supported by increases in consumer spending, investments, and exports, but government spending cuts and rising imports acted as restraints. Domestic sales to final users rose by 3.9%, while the core domestic purchases price index surged to 5.7%. The PCE inflation rate climbed to 5.1%, while the core PCE index slowed to 3.4%.

The Fed's inflation tracking indicators suggest a cooling trend in core inflation pressures, though the economic slowdown may delay progress toward the central bank's targets. The divergence between real GDP growth and inflation expectations could signal a tightening labor market or supply-side constraints.