Investors played a snappy game of Data Tetris on Thursday, turning Commerce and Labor Department reports around in their minds so they fit into a common economic theme.
And that theme is: weaker but still strong? Underwhelming yet reassuring? Something along those lines.
The Commerce Department's initial stab at second-quarter GDP USGDPA=ECI showed the U.S. economy grew by 1.5% at a quarterly annualized rate in the April-to-June period, much more languid than the 2.1% first-quarter growth rate and landing a mile short of the 2.1% repeat analysts expected.
Below the surface, the report shows international trade, with imports far outpacing exports, detracted 1.0 percentage points from the topline. Fixed private investment contributed a paltry 0.5 ppts, while changes in private inventories subtracted 0.7 ppts from the headline figure.
The government outlays segment was a minor detractor.
Consumer spending, which accounts for about 70% of the U.S. economy, did the heavy lifting, increasing by 3.2%—a significant acceleration over Q1's 0.5%. In fact, the consumer contributed a robust 2.1 percentage points to the topline number. Without the consumer, Q2 GDP would have fallen 0.6%.
"The report suggests the economy entered the third quarter with somewhat less momentum than previously thought," writes Brian Therien, senior analyst at Edward Jones. "However, the strength in consumer spending and business investment indicates that underlying demand remains resilient.”
The Commerce Department also released its June Personal Consumption Expenditures (PCE) report USPCE=ECI.
Starting with the PCE price index—the Fed's preferred inflation yardstick—prices inched 0.1% lower last month, and grew by 3.7% year-on-year, a nice cooldown from May's 4.1% annual growth.
Both numbers nailed consensus.
Core prices (which exclude food and energy items) increased on a monthly basis by 0.1%, cooler than the 0.2% predicted by economists and a nice retreat from the prior month's 0.3% growth. Core prices rose 3.3% from June 2025, as expected.
Despite the slight cooldown—which happened amid falling crude prices and easing Middle East tensions—the report repeats the notion that inflation remains well above Warsh & Co's 2% target, a target which "will not waver," according to Warsh himself, following the Fed's decision on Wednesday to let rates stand.
"This report shows elevated inflation, but not accelerating inflation," Peter Cardillo, chief market economist at Spartan Capital Securities, tells Reuters. "But the market doesn't seem to be buying the Fed's tough talk on inflation, because they didn't raise rates yesterday."
Elsewhere in the report, personal income increased by 0.2%, weaker than the 0.3% increase analysts were looking for and an abrupt deceleration from May's 0.7% gain.
Personal consumption grew by 0.3%, hitting the consensus bull's eye and cutting May's growth rate by two-thirds.
With outlays outpacing income growth, the savings rate—the unspent portion of disposable income—dipped to 2.7% from 2.8%.
"Consumers’ spending looks set for a marked slowdown in H2," says Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. "The boost from tax refunds is fading fast, underlying income growth is very weak, higher gas prices still are putting pressure on spending elsewhere, and the personal saving rate—which dipped to a four-year low of 2.7% in June, from 2.8%—already is well below its long-run average."
Markets and major moves
Nasdaq up >2%; S&P 500 advances ~1%; Dow modestly higher
Just Tech, COns Disc gain; Comm Svcs weakest group
Euro STOXX 600 index up ~0.9%
Dollar slides; U.S. crude slips; gold gains; bitcoin up ~2%
U.S. 10-year Treasury yield rises to ~4.67%
Jobless claims and labor market tone
Switching to the labor market, 197,000 U.S. workers joined the queue outside the unemployment office USJOB=ECI last week, 4.8% fewer than the week prior, which was the lowest initial claims print since the moon landing.
The number landed 3,000 south of consensus.
Ironing out weekly volatility, the underlying trend—as expressed by the 4-week moving average—still has a slight downward bias.
Ongoing jobless claims USJOBN=ECI, which are reported on a one-week lag, inched down 0.4% to 1.782 million, or 16,000 fewer than economists predicted.
"Jobless claims were wickedly low once again this week," says Carl Weinberg, chief economist at High Frequency Economics. "This result reinforces the FOMC’s assertion that the labor market is steady."
Even so, jobs sentiment is falling along with the labor market participation rate. The most recent JOLTS report shows weakening hires and rising fires.
So while the labor market looks sturdy from a jobless claims perspective, elsewhere, cracks are forming at the edges.
SPY•
