US economic growth slows to 1.5% in second quarter

US economic growth slowed in the second quarter, underperforming economists' expectations and adding another wrinkle to the Federal Reserve's path forward, even as consumer spending remained strong.

GDP rose at an annual rate of 1.5%, the Commerce Department said Thursday, below economists' estimates of 2% annual growth. The second quarter figures also showed a marked slowdown from the first quarter, when GDP grew 2.1% year over year.

The GDP price index — which measures prices across the entire basket of US goods and services — rose 6.2% year over year, far overshooting estimates of 4% growth and the previous quarter's 3.6% increase.

On a "core" basis, which excludes volatile food and energy costs, the GDP price index rose by a more restrained 3.4% year over year, against estimates of 3.5% and the previous month's markedly hotter 4.4% increase.

The data presents a complicated picture for the Federal Reserve, which on Wednesday voted to hold rates steady. If prices keep inching up while growth slows, worries may spread about the potential for "stagflation," which is when growth stagnates but prices go up anyway. The question for the Fed is how long energy price pressure driven by the war in Iran will continue to keep inflation elevated and hamper the economy.

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But the top-line numbers obscured strength in the US consumer. Personal consumption — measuring how much US households spent on goods and services — rose 3.2% year over year, against estimates of 2.2% growth. The figure was far above the previous month's 0.5% increase, a sign that Americans are continuing to spend.

Growth was bolstered by investments in industrial, transportation, and information-processing equipment, the Commerce Department said, along with growth in petroleum exports as foreign buyers turned to the US for oil after the Middle East was largely cut off.

The mixed picture "reflected a downturn in government spending and decelerations in investment and exports that were partly offset by an acceleration in consumer spending," the Commerce Department wrote.

The GDP data also comes after the Personal Consumption Expenditures index, the Fed's preferred inflation gauge, showed price increases slowing down as Chairman Kevin Warsh remains focused on price stability.

The Personal Consumption Expenditures index rose 3.7% year over year in June, in line with expectations, and up from a gain of 4.1% in May. Month over month, inflation fell 0.1%, in line with expectations and sharply below May's revised 0.5% increase.