US economy slowed more than expected as the Iran war took hold

The U.S. economy grew at an annualized rate of 1.5% in the second quarter.

The United States economy slowed more than expected as an inflation surge took hold over the early months of the Iran war, a government report on Thursday showed.

The economy grew at an annualized rate of 1.5% over three months ending in June, marking a slight slowdown from 2.1% growth recorded in the previous quarter. The figure came in lower than economists' expected.

Still, the latest data outperformed 0.5% annualized gross domestic product (GDP) recorded over final three months of 2025.

The period covered by the data release followed a historic global oil shock set off by the Middle East conflict.

The national average price for a gallon of gasoline soared to a price as high as $4.56 a gallon in May, AAA data showed, before easing somewhat after a preliminary peace agreement last month.

Annual inflation has climbed to 3.5%, putting it more than percentage point higher than the Federal Reserve's target rate of 2%.

Still, hiring has proven more resilient than many economists feared, despite elevated costs for businesses and shoppers.

In recent quarters, a burst of investment in artificial intelligence has accounted for a large share of the nation's economic growth.

A surge of AI spending accounted for roughly two-thirds of gross domestic product growth over the first half of 2025, JPMorgan Asset Management found, outpacing the contribution made by hundreds of millions of U.S. consumers. Many of the nation's largest companies have poured funds into the chips and data centers necessary to operate AI.

The combination of elevated inflation and a resilient labor market, meanwhile, has raised the chances of an interest rate hike, futures markets show. The prospect of a rate increase poses the risk of a slowdown in economic activity over the coming months as corporations face the prospect of higher borrowing costs.

The Federal Reserve was set to announce its latest decision on the level of interest rates on Wednesday afternoon, just hours before the release of the GDP data.

The benchmark rate stands at a level between 3.5% and 3.75%. That figure marks a significant drop from a recent peak attained in 2023, but borrowing costs remain well above a 0% rate established at the outset of the COVID-19 pandemic.

Fed Chair Kevin Warsh, who took the helm of the central bank this summer, has vowed to dial back inflation.

"Persistently high prices are a burden for the American people," Warsh told reporters in Washington, D.C., last month. "This committee will deliver price stability."