The U.S. economy expanded at just 1.5% from April through June, missing economists' expectations as rising imports dragged down growth and mortgage rates climbed to their highest level in a year. The Commerce Department reported the deceleration from 2.1% in the first quarter, while the average 30-year fixed-rate mortgage rose to 6.66%, according to mortgage buyer Freddie Mac.
The slowdown comes as Americans face renewed pressure at the pump and checkout counter. Gas prices jumped to $4.11 per gallon from $3.85 a month ago, driven by escalating conflict between the U.S. and Iran that sent oil prices careening between $72 and $102 per barrel in July. Brent crude settled at $88.68, up 2.1% for the week.
Consumer Spending Holds, But Confidence Wavers
Consumer spending, which accounts for about 70% of U.S. economic activity, increased at a 3.2% annual clip, up sharply from 0.5% in the January-March period. That's the bright spot in an otherwise tepid report. Business investment excluding housing rose at an 8.4% pace, down from 10.6% in the first quarter but still reflecting robust investment in artificial intelligence.
Yet Americans' confidence in the economy fell this month. The Conference Board said Tuesday that its consumer confidence index dropped to 90.8 in July from 92.2 in June, remaining in the same tepid range it's held since the beginning of the year. In late 2024 and early 2025, readings were well above 100.
Consumer attitudes had improved modestly in June as gas prices came down to around $3.70 a gallon from more than $4.50 in late April and early May. But the reprieve didn't last.
Housing Market Faces Renewed Headwinds
The average long-term U.S. mortgage rate rose for the fourth consecutive week, reaching its highest level in a year. The benchmark 30-year fixed-rate mortgage climbed to 6.66% from 6.58% last week. One year ago, the average rate was 6.72%. Borrowing costs on 15-year fixed-rate mortgages, often sought by borrowers refinancing a home loan, also rose this week to 6.04% from 5.96%. A year ago, it was 5.85%, Freddie Mac said.
The uptick represents another setback for prospective homebuyers hoping for a break from elevated home loan borrowing costs. It's a reminder that while the Federal Reserve has held rates steady, market forces continue to push borrowing costs higher.
Fed Holds Steady Despite Internal Dissent
The Federal Reserve left its key interest rate unchanged Wednesday at around 3.6%, marking the fifth straight meeting without a change. But the decision wasn't unanimous. Three officials dissented in favor of higher rates as the central bank wrestled with how to deal with persistently high inflation. The Fed's favored measure of inflation grew more slowly last month but remained above the central bank's 2% target.
Some economists and Wall Street analysts had predicted the Fed would hike its rate by a quarter point. While the decision to stand pat could be seen as good news for consumers, they might not feel much relief with the average credit card rate still near 20% and mortgage rates the highest since last August.
Labor Market Remains Resilient
U.S. filings for jobless aid in the week ending July 25 rose by 9,000 to 197,000, the Labor Department reported Thursday. The previous week's figure was revised up by 1,000 to 188,000 but remained the lowest in more than 50 years. Analysts surveyed by FactSet forecast 207,000 new applications. Weekly filings for unemployment benefits are considered representative of layoffs and are close to a real-time indicator of the health of the U.S. job market.
The U.S. stock market swung wildly but ended the week with gains. Amazon leapt, Apple sank, and rising oil prices added to worries about inflation already squeezing the bond market.
The economy, inflation and how those forces could affect Americans were front and center over the past week. Trips to the grocery store and gas station were more painful than they were last year, and rising costs were affecting the decisions of both households and businesses.
Why This Matters:
The combination of slowing growth, rising mortgage rates, and persistent inflation above the Fed's target presents a troubling scenario for policymakers who've relied on consumer spending to carry the economy. With GDP growth missing expectations and consumer confidence stuck in a tepid range, the resilience of household spending may be tested. The internal dissent at the Federal Reserve signals growing concern that the central bank's cautious approach may not be enough to tame inflation, especially with geopolitical tensions driving energy costs higher. For prospective homebuyers, the fourth consecutive week of rising mortgage rates compounds affordability challenges in an already tight housing market. The strength in business investment, particularly in artificial intelligence, offers some hope for productivity gains, but it won't provide immediate relief to families facing $4.11 gas and near-20% credit card rates. The robust labor market remains the economy's strongest pillar, but whether it can withstand these mounting pressures is the question facing both households and the Fed.