We got a two-fer of major economic data on Thursday. This included
the first look at real GDP for the 2nd quarter of 2026, and the economic growth topline was.... not great.
Economic growth was weaker than expected in the second quarter though underlying drivers were mostly solid. At the same time, inflation in June held well above the Federal Reserve’s goal and complicated the central bank’s policy path, the Commerce Department reported Thursday.
Gross domestic product, a broad measure of goods and services, increased just 1.5% for the April-through June period, according to Bureau of Economic Analysis numbers adjusted for seasonality and inflation.
Economists surveyed by Dow Jones had been looking for a growth rate of 1.8%, following the 2.1% increase in the first quarter.
Sounds bad, especially given that worker producitivty has been growing stronger than 1.5% in recent quarters, but then you dig inside the numbers, and you see consumption bouncing back in the US for Q2, and business investment staying strong. And the main reason the overall GDP number was disappointing was because of a large increase in imports and a decline in inventories.
I've often used a stat I call "Core Private GDP", which takes out the contributions to GDP from trade, government and inventories, all of which are volatile and not necessarily a reflection of the day-to-day economy. If you look at it that way, Core Private GDP growth more than doubled in Q2 2026.
It's all the more remarkable when you realize that the same GDP report says prices in its gross domestice purchases index was up by an annual rate of 5.7% in Q2, so core GDP was up by over 9% before inflation. You read that, and it sounds like we are in boom times and money should be flowing everywhere.
But that's not really true, as that same Thursday's income and spending report showed. In fact, the increase in Employee Compensation for those three months was lower than any of the last 4 quarters of the Joe Biden presidency (a time when many felt they could not keep up with rising prices), and lower growth than what we saw in Q1 2026.
The largest source of increased aggregate income for the second quarter came through non-work sources such as interest and dividend income, and owners' income. That includes
billions in payments in May to farmers to make up for losses due to natural disasters in 2023 and 2024.
So if people aren't seeing getting much more money from their jobs, why has been consumption been so strong in the face of higher inflation? Because Americans aren't saving anything, as the national savings rate declined again in June, down to 2.7%. The only time it has been lower in the last 5 years was during the peak months of inflation in the Spring and Summer of 2022.
But if you think our savings rate will rebound as the Summer winds down, I'll note one major difference between August 2026 and August 2022. 4 years ago, gas prices were coming down from their Ukraine War-induced spike, while in 2026, they've been back on the rise for most of the last month.
If you think spending ourselves broke in the face of rising prices is a bad thing, one way that can be stopped is by making it more lucrative to save. And that's done by having the Fed raise interest rates and other methods to slow down price increases and the economy in general.
The Fed passed on raising its Fed Funds rate last week, but the bond market has been acting on its own to make it more expensive to borrow.
The Clampdown is coming, and may well already be underway (consumer spending slowed in June). The question is who and what gets clamped on as a result.
