The US economy grew at a 1.5% annualized rate in the second quarter, the government reported Friday, while weekly jobless claims held below expectations. The mixed signals — slowing growth paired with a resilient labor market — point to a Federal Reserve that may keep interest rates unchanged at its next meeting.
GDP growth slows to a modest pace
Gross domestic product expanded 1.5% in Q2, down from the previous quarter's pace. The figure reflects a cooling economy, though not one in recession. Consumer spending and business investment both contributed to the growth, but at a slower clip than earlier in the year.
The slowdown comes as the Fed's rate hikes over the past year work their way through the economy. Higher borrowing costs have weighed on housing and manufacturing, but the broader expansion has held up.
Jobless claims remain below forecasts
Initial unemployment claims came in lower than economists expected for the week ending July 20. The number of people filing for benefits stayed near historic lows, a sign that employers are still reluctant to lay off workers.
The labor market has been a persistent source of strength. Even as GDP growth decelerates, companies continue to hire at a steady pace. That resilience complicates the Fed's task: a tight labor market can fuel wage growth and keep inflation elevated.
What the data means for the Fed
The combination of slower growth and a still-strong job market gives the central bank room to hold rates steady. The Fed has kept its benchmark rate at 5.25% to 5.5% since July 2023, and most policymakers have signaled they want to see more progress on inflation before cutting.
Friday's GDP report reinforces that cautious stance. If the economy is cooling but not collapsing, and the labor market isn't cracking, there's little urgency to lower rates. At the same time, a sharper slowdown could force the Fed's hand later this year.
The data will be a key input for the Fed's next policy decision, expected in the coming weeks. Investors will also watch the July jobs report and inflation numbers for further clues on the timing of any rate cut.
