The U.S. economy expanded at a sluggish 1.5% annual rate between April and June, weighed down by rising imports, even as consumer spending demonstrated surprising resilience.

Despite a slowdown in the Federal Reserve’s preferred inflation gauge, it rose 3.7% last month above its 2% target, fueling public frustration over the high cost of living just under 100 days before the midterm elections.

Gross domestic product (GDP), the nation’s total output of goods and services, decelerated from a 2.1% growth rate in the first three months of 2026, falling short of economists' projections, the Commerce Department reported Thursday.

However, consumer spending, which drives approximately 70% of US economic activity, surged at a 3.2% annual pace, a significant increase from the 0.5% recorded in the January-March period.

A key indicator of the economy’s underlying strength, which excludes volatile government spending and trade figures, showed robust expansion at a 3.9% annual rate, up from 1.7% earlier in the year.

Business investment, excluding housing, also remained strong, rising at an 8.4% pace, albeit down from 10.6% in the first quarter, largely reflecting a surge in artificial intelligence investments.

Imports, which are subtracted from GDP calculations as they represent goods produced outside the US, climbed at an 11.5% pace.

This increase was partly driven by a surge in shipments of computer chips and other products supporting AI investment, ultimately shaving 1.5 percentage points off second-quarter GDP growth.

Olu Sonola, head of US economics at Fitch Ratings, commented: "The consumer rescued the quarter. AI investment remains a powerful growth story, but the import surge underpinning the buildout is a reminder that an AI boom does not automatically translate into an equally large boost to U.S. GDP."

The Commerce Department also revealed that its personal consumption expenditures (PCE) price index, the Federal Reserve’s favored inflation measure, rose 3.7% last month from June 2025.

This marked a decrease from the 4.1% year-over-year increase observed in May. Excluding volatile food and energy prices, so-called core consumer prices were up 3.3% from a year earlier, a slight change from May’s 3.4% increase.

Every month, prices actually fell 0.1% from May to June, largely due to a 9.2% drop in gasoline and other energy products.

While the PCE figures largely met economists' expectations, the year-over-year inflation rate has persisted above the Fed's 2% target for over five years, leading some central bank officials to express impatience with the pace of progress.

The Federal Reserve opted to keep its benchmark interest rate unchanged for the fifth consecutive meeting on Wednesday, though three regional Fed presidents dissented, advocating for rate hikes to combat elevated inflation.

The American economy has shown surprising resilience despite the Iran war and the resulting spike in energy prices.

The job market has rebounded this year from a lackluster 2025, adding an average of 92,000 jobs a month compared to fewer than 10,000 monthly in 2025, when high interest rates and erratic use of tariffs during the Trump administration discouraged business hiring.

The persistent higher costs are a significant source of frustration for Americans as November’s midterm elections approach, which will determine whether Republicans aligned with Donald Trump retain full control of Congress.

A recent AP-NORC poll indicates growing public dissatisfaction with the Iran war, with approximately 7 in 10 US adults – 72% – deeming it "extremely" or "very" important for the US to prevent domestic oil and gas prices from rising, an increase from 67% in March.