US Nonfarm Payrolls Fall 23,000 in June; Q2 GDP Growth 1.5%, CPI 3.5%, H1 Deficit $764.1 Billion Up 22%

In the first half of 2026, the U. S. economy shifted from relatively rapid growth to moderate growth. Labor Department data showed nonfarm payrolls fell by 23,000 in July, while combined job gains for May and June were revised down by 103,000. Under the multiple impacts of geopolitical conflict, tariff policy adjustments, and elevated financing costs, job growth momentum weakened, with inflation still above the Federal Reserve's 2% longer-term target. The personal saving rate declined steadily from 4.4% in January to 2.7% in June, raising questions about the sustainability of consumer resilience. Meanwhile, capital spending on artificial intelligence infrastructure provided new incremental support.

Commerce Department data showed real gross domestic product (GDP) grew at an annualized rate of 2.1% quarter-on-quarter in the first quarter of 2026 and 1.5% in the second quarter, significantly below the 3.8% and 4.3% growth rates recorded in the second and third quarters of 2025. The labor market remained broadly stable but with declining activity. The unemployment rate rose from 4.0% in January 2025 to 4.2% in June 2026, while the labor force participation rate fell from 62.6% to 61.5% over the same period, and corporate hiring turned cautious. Slower immigration growth and population aging further pushed down the participation rate, and the labor market exhibited a low-flow pattern of low hiring and low layoffs.

inflation experienced a phased rebound. From December 2025 to May 2026, the year-on-year increase in the consumer price index (CPI) rose from 2.7% to 4.2%, before falling back to 3.5% in June. The personal consumption expenditures (PCE) price index rose from 2.9% to 4.1% year-on-year, then fell to 3.7% in June, while core PCE rose 3.3% year-on-year. This inflation rebound was related to the lagged pass-through of earlier tariff increases and supply-side factors such as higher energy prices. The decline in energy prices in June brought down headline inflation, but core inflation fell more slowly, indicating persistent inflation stickiness.

From an expenditure structure perspective, U. growth support showed divergence. In the second quarter of 2026, consumption re-emerged as the main support, while fixed investment continued to provide a strong boost, contributing 2.12 percentage points and 1.20 percentage points to real GDP growth, respectively. Imports subtracted 1.51 percentage points from real GDP growth, while exports added only 0.50 percentage points, with net exports together subtracting 1.01 percentage points, preventing the strong contributions from consumption and investment from fully translating into overall economic growth.

Uncertainty in the U. economic outlook has increased markedly. Internationally, overseas military operations and geopolitical tensions pushed up energy and transportation costs; earlier tariff increases raised domestic prices for some imported consumer goods, and repeated tariff adjustments increased uncertainty for corporate procurement, inventory, and supply chain arrangements. Domestically, higher financing costs constrained housing and small and medium-sized enterprises more notably; the large deficit and heavier interest burden narrowed the scope for future fiscal support expansion.

Higher energy prices following geopolitical conflicts were an important driver of the inflation rebound. After shipping through the Strait of Hormuz was disrupted in late February, the monthly average spot price of Brent crude oil rose from $70.89 per barrel in February to $117.29 per barrel in April, an increase of approximately 65.5%. The year-on-year increase in the PCE price index rose from 2.9% in February to 4.1% in May, a cumulative increase of 1.2 percentage points, while core PCE over the same period rose from 3.0% to 3.4%, an increase of only 0.4 percentage points. In June, Brent oil fell back to $85.40 per barrel, and the year-on-year increases in the PCE and core PCE price indexes also fell to 3.7% and 3.3%, respectively. During the period of the shock, private domestic final demand continued to expand, with real final sales to private domestic purchasers growing at an annualized rate of 3.9% quarter-on-quarter in the second quarter, faster than 1.7% in the first quarter.

The tariff impact showed characteristics of continued pass-through price effects from earlier periods and reduced new pressure. In February, a U. Supreme Court ruling invalidated several existing measures, and replacement measures only partially offset the effect of the rescinded measures, bringing down the average tariff rate. The lingering effects were still reflected in prices: core PCE rose 3.4% year-on-year in May; price increases for categories such as home appliances, which were more affected by tariffs, accelerated relative to the pre-tariff trend. On a seasonally adjusted balance-of-payments basis, the U. goods and services trade deficit narrowed from $124.704 billion in January 2025 to $73.3 billion in June 2026. On a not seasonally adjusted Census Bureau basis, the U. goods trade deficit with China narrowed 33.9% year-on-year in the first half of 2026, driven by a 22.8% decline in imports from China, while exports to China fell only 0.7% over the same period.

Financing conditions and fiscal space constrained economic growth. From January to July 2026, the Federal Reserve held the federal funds rate target range at 3.50% to 3.75% across five meetings; the average rate on a 30-year fixed-rate mortgage was 6.49% for the week ending June 25. In the first half of 2026, the seasonally adjusted annualized monthly averages of new private housing permits, starts, and completions fell 1.8%, rose 0.4%, and fell 9.3% year-on-year, respectively. Small and medium-sized enterprises, which rely more on bank credit and credit cards, faced tighter financing conditions, while large corporate bond issuance remained active. On the fiscal side, cumulative federal revenue from January to June 2026 totaled $2.93 trillion, roughly flat year-on-year; spending reached $3.69 trillion, up 3.9% year-on-year; and the deficit stood at $764.1 billion, expanding 22.0% from $626.4 billion in the same period of 2025. Higher fiscal spending can still support demand, but the widening deficit and rising interest burden will further compress the scope for future fiscal policy.