The US economy grew at a 1.5% pace in the second quarter of 2026, the Commerce Department reported on July 30. That was down from 2.1% in the first quarter and below the 2.1% rate economists polled by Reuters had expected. It was the first of three estimates the government will release for the quarter.

Growth slowed mainly because of trade. When Americans buy more goods from other countries than they sell abroad, those imports pull down the overall growth number. The goods trade deficit was $101.5 billion in June, down 4.2% from May. But both imports and exports fell, and the impact of imports on the growth math was large enough to cancel out other gains. Reuters had flagged this on July 28.

Underneath the slowdown, the domestic economy stayed strong. Consumer spending rose during the quarter, and businesses poured money into artificial intelligence infrastructure. That underlying strength was hidden by the trade numbers.

Inflation made things harder. The Federal Reserve's preferred inflation measure, called PCE, rose 3.7% in June compared to a year earlier, down from 4.1% in May. That was a step in the right direction. But core inflation, which leaves out food and energy prices to show the underlying trend, was 3.3%, barely changed from 3.4% the month before. Both numbers are well above the Fed's 2% target.

A day before the growth report, the Federal Reserve kept its key interest rate unchanged on July 29, the fifth meeting in a row with no change. What stood out was the disagreement. Three regional Fed officials voted against the decision, wanting to raise rates instead to fight inflation. That kind of coordinated pushback in one direction had not happened in a decade.

Fed Chair Kevin Warsh said inflation had been too high for years, admitting that the central bank's current approach has not achieved the stable prices it aims for. The Fed now faces a tough spot: growth is slowing, inflation is not going down fast enough, and a growing group of policymakers thinks the Fed is being too cautious.

The war in the Middle East is a big part of the inflation problem. The conflict centered on Iran has pushed oil prices higher, and higher energy costs raise prices across the economy. A US-Iran peace deal was announced and then fell apart. The two sides resumed fighting, and oil prices climbed again.

Job growth has improved but from a very low point. US employers added an average of 92,000 jobs per month in 2026, up sharply from fewer than 10,000 per month in 2025. Last year's hiring collapse was blamed in part on Donald Trump's tariffs, which made businesses hesitant to hire because of uncertainty about costs and supply chains. The 2026 recovery is real but still below what a healthy, low-inflation economy looks like.

People are frustrated. A Harris Poll released in July found that two-thirds of Americans, including 49% of Republicans, had little faith the federal government would address high prices. That matters for the November 2026 midterm elections, which will decide whether Trump's Republicans keep full control of Congress.

The broader context here is an economy stuck between opposing forces with no easy fix. Domestic spending and AI investment are keeping things going, but trade is dragging down the growth number, energy shocks are pushing prices up, and the job market is recovering from a near-collapse rather than booming. The Fed officials who want higher rates argue that letting inflation stay high while growth slows could make people expect inflation to last, which can become a self-fulfilling problem. The officials who want to hold rates seem to be betting that the economic slowdown itself will eventually bring prices down.

The government will release two more estimates of second-quarter growth, and future inflation reports will show whether June's improvement was the start of a trend or just a blip. For now, the economy is growing too slowly to shake off inflation and too steadily to be called a recession, with a central bank split on what to do next.