According to the Commerce Department, the U.S. economy expanded at a 1.5% annualized pace in the April-to-June period. That came in below the 1.8% that economists surveyed by Dow Jones had expected.
It was also a clear step down from the 2.1% growth rate in the first quarter.
Two main things dragged on the headline number. Federal government spending dropped 0.3% in the quarter. And businesses drew down their inventories by 0.7%, which subtracts directly from GDP.
When excluding inventories and government spending, underlying demand - measured by final sales to private domestic purchasers - grew 3.9% in Q2.
Personal spending jumped 2.1% in the quarter, compared to just 0.4% in Q1.
The personal consumption expenditures price index, often called the PCE, climbed 3.7% in June from the same month last year. That is the Fed's preferred inflation gauge, and it is well above the central bank's 2% target.
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Strip out food and energy, and core PCE came in at 3.3%.
On a monthly basis, headline PCE fell 0.1% while core PCE rose 0.1% in June.
Energy prices actually fell in June, dropping 5.9% from May. Gasoline alone tumbled 9.2%. Housing inflation, by contrast, rose 0.2% month over month.
In June, Americans saved only 2.7% of their income, the smallest share in four years.
Following the quarter's close, the Federal Reserve held its key interest rate steady between 3.5% and 3.75%. That vote was 9-3, with three dissenting regional presidents who expressed concerns about higher prices and a failure to make progress on inflation.
The Fed has not moved rates all year.
The combination of slowing growth and elevated inflation presents a challenging environment for policymakers. While the Fed has kept rates unchanged, the dissenting votes indicate some officials are pushing for further tightening to combat persistent price pressures. The robust consumer spending, fueled by dwindling savings, may not be sustainable, raising the risk of a sharper slowdown later in the year.
The personal savings rate dropped to 2.7% - a four-year low - suggesting that households are drawing down their reserves to maintain spending. If income growth fails to keep pace with inflation, that spending momentum could stall, potentially dragging down GDP further in the second half of the year. Meanwhile, the 3.9% growth in final sales to private domestic purchasers shows that underlying demand remains solid, yet the inventory drawdown and government cutbacks indicate that businesses and the public sector are pulling back, which may signal a broader caution about the economic outlook.
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