Economy Statement for the Treasury Borrowing Advisory Committee

Introduction

The economy under the Trump Administration is strong, supported by robust business investment in equipment and intellectual property products, as well as solid household consumption growth. Data on investments, sales, and earnings indicate that the economy is poised for continued expansion. Business investment rose by nearly 10% at an annual rate over the first half of 2026, driven by investments in new equipment and intellectual property.

On the labor side, employment growth accelerated in the second quarter, with 334,000 net new jobs added. Annual worker wage growth continues to outpace inflation, and the unemployment rate remains low.

Despite recent increases in volatility of prices linked to the Iran conflict, the U.S. economy is increasingly resilient to fluctuations in availability of oil supply from the Strait of Hormuz. The United States is the largest producer of petroleum and natural gas and is increasingly a net exporter of both, strengthening energy resilience to supply shocks.

Real Gross Domestic Product (GDP)

According to the advance estimate, real GDP grew by 1.5% at an annual rate in the second quarter of 2026 (2Q26), following the 2.1% advance in 1Q26. However, the slower pace of headline growth belied stronger core demand by the private sector, which reflects consumer and business confidence in the economy and signals a solid base for future growth.

• Personal consumption expenditures (PCE), which account for roughly two-thirds of the U.S. economy, was the strongest contributor to GDP growth. PCE growth accelerated sharply to 3.2% from the previous quarter's 0.5 % rate, adding 2.1 percentage points to real GDP growth. Consumer spending on goods (led by prescription drugs and motor vehicles and parts) as well as services (led by food services and accommodations) picked up in 2Q.
• Business fixed investment (BFI) remained very strong, growing by 8.4% in 2Q26 and adding 1.2 percentage points to growth after surging by over 10% in the previous quarter.
  • Equipment investment remained rapid at 15.2%, roughly matching the first quarter's pace. In 2Q, equipment spending was broadly based, with strong spending on industrial equipment, transportation equipment, and information processing equipment.
  • Investment in intellectual property products expanded by 8.8%, reflecting businesses' investment in software, as well as research and development.
  • Although structures investment declined on net, spending on data centers continued to grow at a double-digit pace.
• Residential investment increased for the first time in six quarters, rising by 1.5 percent and adding 0.1 percentage point to real GDP. Spending on single-family structures and brokers' commissions. (The latter mainly reflects rising existing home sales drove the expansion.)

In total, private domestic final purchases - the combination of PCE, BFI, and residential investment - rose 3.9% at an annual rate in 2Q26, the strongest pace in over three years.

Of the remaining components of GDP, there was a decline in net exports. Growth slowed for exports of goods and services - though exports of petroleum and related products rose at the strongest pace since 2017. Meanwhile growth of imports maintained a strong, steady pace, largely reflecting more imports of capital equipment. On balance, net exports subtracted 1.0 percentage points from GDP growth.

In addition, the change in private inventories and total government spending also subtracted from economic growth - though the latter largely reflects an accounting identity as sales from the Strategic Petroleum Reserve counted as demand among other GDP components. Altogether, these components subtracted 0.8 percentage points from real GDP growth in 2Q26.

Labor Markets

Job growth accelerated notably in 2Q26, and other measures of labor market health either improved or remained relatively stable (see Table 2 - Labor Market Indicators). Unemployment claims in mid-July fell to the lowest since 1969. Although the headline labor force participation rate (LFPR) continued to ease due to underlying demographic pressures, the prime-age (ages 25 to 54) LFPR remained at a high level. Job openings increased in both absolute terms and relative to the number of vacancies per unemployed person.

• For the second consecutive quarter, the pace of net total (private and public) job creation accelerated, primarily reflecting private sector hiring. After increasing sharply to an average of 73,000 per month during 1Q26 from late 2025, job growth increased again in the latest quarter to an average 111,000 per month.
  • The private sector continued to lead job growth. In 2Q26, average job growth in the private sector increased to 99,000 per month, after more than tripling from 4Q25 to a pace of 78,000 per month in 1Q26.
  • Government payrolls increased in 2Q26, after declining in the previous two quarters related to the end of the Deferred Resignation Program. In 2Q26, the government sector added an average of 13,000 jobs per month.
• Net job growth in 2Q26 exceeded most estimates of breakeven employment growth, helping to keep the unemployment rate broadly stable. In 2Q26, the unemployment rate remained at the 1Q average of 4.3%, in line with mainstream estimates of the rate of unemployment that is consistent with stable inflation and excludes fluctuations in aggregate demand. In June 2026, the unemployment rate improved further to 4.2%.
• Wage growth continued to be strong in the second quarter: nominal average hourly earnings (AHE) for all employees in June 2026 were up 3.5% since June 2025 and average weekly earnings were up 3.8% over this period. Adjusted for inflation, real wage growth (average hourly and weekly earnings, deflated by CPI) was up on a year-over-year basis across both measures.
  • The difference between AHE and AWE growth reflects a small increase in average weekly work hours. Real AHE increased 0.1% over the year ending in June while real AWE increased 0.3% over the year.
  • The report on quarterly weekly earnings for full-time workers showed particularly strong nominal growth in 2Q26, especially for lower-income workers. In 2Q, seasonally adjusted median usual weekly earnings grew 4.4% from a year earlier, up from 1Q's 3.4% pace. Meanwhile, the 25th percentile of nominal usual weekly earnings rose 5.5% in 2Q, the strongest four-quarter gain since 4Q22 and accelerating from 1Q's 2.9% increase.
  • Average hourly and weekly earnings both can obscure economic fundamentals due to compositional changes and other biases. The Employment Cost Index (ECI) for all private workers, which controls for these biases and includes benefits, rose 3.3% over the year ending in June 2026.
• Labor force participation eased slightly in 2Q26, reflecting demographic pressures and immigration enforcement. The overall LFPR eased to an average of 61.7% in 2Q26, following a decline to 62.0% in 1Q26.
  • Although the LFPR among prime-age workers ticked down somewhat in 2Q26 to 83.7%, it remained 0.6 percentage points above the previous business cycle peak in January 2020. Participation remains particularly resilient among prime-age men: the LFPR for this group has averaged 89.6% in each of the past three quarters.
• Another measure of labor demand turned up in 2Q26 after declining throughout 2025. After stabilizing around 6.9 million per month in 4Q25 and 1Q26, average monthly job openings increased to 7.6 million in April and May (latest data available). In addition, the ratio of job openings improved for the second consecutive quarter, rising to an average of 1.0 per month in 2Q26.
• Other indicators reflect labor markets' ongoing health and stability: the layoffs rate remains stable and near historical lows, initial unemployment claims remain exceptionally low by historical standards, and the hires rate has remained stable for the past 2½ years.

Inflation

Headline CPI inflationary pressures eased considerably in 2Q26. Average monthly inflation for the second quarter decelerated: average headline inflation was 0.2% per month in 2Q26, down from 0.4% in 1Q26 (see Table 3 - Inflation Indicators). In June 2026, the headline consumer price index (CPI) fell by 0.4% from its level in May. Twelve-month headline CPI inflation was 3.5%, up from the 2.7% annual rate through June 2025, due mostly to hostilities with Iran.

• Energy price inflation slowed dramatically in 2Q26. After the initial conflict-related price jump in March, energy prices rose at a slower pace in April and May and retreated in June, following the ceasefire with Iran. As a result, CPI inflation for energy goods and services slowed sharply, averaging 0.6% per month in 2Q26, following a monthly average of 3.2% in 1Q26.
• Food price inflation was relatively stable in 2Q26, ticking up to a monthly average of 0.3% from 1Q26. On a twelve-month basis food price inflation was stable at 3.0% through June 2026, matching the year-earlier rate. The stability of the recent twelve-month rates reflects some easing of energy inputs for food production. Annual inflation in the food at home category was 2.7% in June - and has declined slightly in the past two months.

As of June 2026, twelve-month core CPI inflation, which excludes the volatile components of food and energy, was 2.6%, slowing from the 2.9% rate over the year through June 2025. On a monthly average basis, core inflation was 0.2% per month in the first and second quarters.

• Monthly core goods prices were 0.1% lower on an average basis in 2Q26, after edging up by 0.1% on average per month in 1Q26. On a twelve-month basis, core goods inflation was 0.8% through June 2026, the slowest rate since June 2025.
• Inflation for rent of housing services (rent of primary residence and owners' equivalent rent) has eased since 2024. Although rent of housing inflation accelerated to an average of 0.4% per month in 2Q26, this reflected a one-time adjustment to account for inadequate data during the October 2025 federal government shutdown. Rent of housing inflation was 3.2% over the year through June, below the pre-pandemic average of 3.3%.
• Inflation for non-housing core services slowed by half in 2Q26, averaging 0.2% per month, after averaging 0.4% per month in the previous quarter. Over the year through June 2026, non-housing core services inflation was 3.2%, up slightly from the 3.0%, year-earlier rate.

Inflation as measured by the PCE price index has notable differences in weights and methodologies versus the CPI. Over the past 20 years, twelve-month CPI inflation has exceeded PCE inflation by about 0.35 percentage points on average. Over the year through June 2026, the headline PCE price index was 3.7%, 1.1 percentage points above the 2.6% pace over the year through June 2025-though fluctuations in energy prices earlier in the second quarter were a large contributor to the PCE inflation pickup. The Federal Reserve's target for headline PCE inflation is 2%.

Risks to the Outlook

We highlight some of the medium-run risks to the outlook below.

Looking ahead to the next few quarters, the outlook for the U.S. economy is favorable. On balance, economists view the risk of a recession as relatively low. According to The Wall Street Journal's survey of economists in July, the average probability of a recession in the next twelve months was just 25%, down from 33% in the April survey. The survey also indicated an improved near-term outlook: projected real GDP growth in 2026 was revised higher, as was average payroll growth over the next four quarters. In addition, respondents expected a lower unemployment rate in December 2026. On the other hand, respondents also projected higher and more persistent inflation, leading them to project higher interest rates than in the April survey.

Energy prices and geopolitical uncertainty: Geopolitical uncertainty remains a risk to the medium-term inflation outlook. Energy prices are one of the most volatile categories of inflation. Indeed, monthly energy prices rose 3.8% in April and 3.9% in May before falling 5.7% in June. The timing, duration, and magnitude of energy price swings adds upside risk to inflation for other consumer goods and services - such as food (through fertilizer and fuel for farming equipment) and airfares - adding uncertainty to the medium-run inflation outlook.

Importantly, the Trump Administration's policies have made the U.S. economy more resilient to fluctuations in global oil prices. This resilience is due to a wide range of policies enacted, including deregulatory actions that have increased production and exports of oil and gas, and strategic actions abroad that have resulted in increased demand for U.S. crude and increased supply to the U.S. outside of the Middle East. Average domestic crude oil production in 2025 rose by 350,000 barrels per day relative to the 2024 average. Production and exports have further risen in 2026 as U.S. producers continue to build out U.S. infrastructure. The United States is increasingly the world's largest producer of petroleum products and natural gas, and it is a net exporter of both.

Labor markets: While labor markets are in balance, labor data indicate an environment of less job turnover than in the past, which could leave the economy with less slack to absorb a negative shock. For the past two years, the median private-sector hires rate has been 3.6%.

By contrast, layoffs and discharges rates for the private sector have remained near historical lows, with the layoffs rate at just 1.1% in June. The lower turnover environment, while indicating that labor markets are in balance, also suggests a large shock could shift markets out of balance as hiring may not be able to offset an increase in the layoffs and discharges rates.

Business fixed investment and the manufacturing outlook: Recent data suggest that the economy is in the early stages of a policy-driven capital expenditures boom. Since the passage of the Administration's signature tax bill (the Working Family Tax Cuts), fixed business investment has risen by a combined 6.1% through 2Q26, suggesting that provisions in the tax law - such as full expensing of research and development, 100% bonus depreciation for business equipment investments, and restoring deductibility of interest expenses for capital-intensive manufacturers - have been contributing to robust business investment. Indeed, business equipment investment alone has added 0.5 percentage points to GDP growth over the past four quarters, as has spending on intellectual property products.

This capital expenditures boom bodes well for future economic growth. Capital investment is correlated with productivity growth, which is a strategic pillar of the Administration's economic agenda: productivity growth helps drive stronger economic growth and, as a positive supply side development, is usually disinflationary. Over the year ending in 1Q26, real output rose 3.2% while nonfarm business sector productivity increased 2.8%. (Data for 2Q26 will be released Thursday, August 6.) Consistent with these encouraging indicators, shipments and new orders of core capital goods just hit all-time highs.

The tax law also included a temporary provision for full depreciation deduction for the costs of new, nonresidential manufacturing facilities. Although real investment in factories and manufacturing structures has declined since mid-2024, the outlook for future manufacturing appears favorable. Jobs related to the construction of nonresidential buildings have grown by 85,000 since September 2025, presaging future manufacturing sector growth as new facilities are completed and products are deployed. In addition, firms that manufacture durable goods have increased their payrolls by 43,000 so far this year. Job openings in durable goods manufacturing have grown by 67,000, and layoffs and discharges have fallen by 21,000.

Future business fixed investment - as well as the rates of return on labor and capital that businesses earn from that investment- will continue to serve as key determinants of long-term productivity and economic growth.

Artificial intelligence (AI): Investment in artificial intelligence has been a significant driver of economic growth in recent quarters. Throughout 2025, AI-driven investment (BFI in software, computers and hardware, and data center structures relative to pre-LLM trends) accounted for nearly 30% of GDP growth. This trend continued throughout the first two quarters of 2026.

Firms' continued investment in artificial intelligence is likely to lead to efficiency gains, particularly in service-sector industries where productivity growth has been slower. However, the timeline and magnitude of productivity gains is uncertain, as is the ultimate effect on the composition of labor markets. If the integration of artificial intelligence acts as a standard technology improvement, productivity growth could return to historical norms after a period of above-trend growth. On the other hand, artificial intelligence could prove transformational and permanently upshift the path of productivity as it enables workers to build skills and human capital faster than in the past. Artificial intelligence also could have disruptive impacts on the economy and labor markets. Firms that are slow to adapt could find themselves at a competitive disadvantage, as could workers who delay incorporating artificial intelligence to improve their own skills' growth and productivity.

Conclusion

The U.S. economy remains resilient, and the outlook is favorable. Robust business investment and steady household consumption growth remain the key drivers of economic growth. Job growth has picked up and the unemployment rate is at or near estimates of full employment. And although inflation has recently shifted, the U.S. economy is resilient to fluctuations in energy prices because of increased oil production, and energy prices should recede following the cessation of conflict in Iran.

The Trump Administration has successfully stewarded major fiscal legislation to prevent a historic tax increase. The Council of Economic Advisers has estimated that pro-growth provisions in the law are expected to increase the level real GDP by 4.6-4.9% in the first four years of implementation.

Business conditions suggest that now is a good time to expand and invest in America. Investment data bode well for increasing economic growth as the private sector leads. A net 20% of small businesses report plans to make capital outlays, and a net 13% expect the economy to improve - a reading that is higher than any during the Biden Administration. In addition, the Business Roundtable reports that its index of CEO expectations of capital expenditures is now at its highest level since early 2022.

Trillions of dollars of investments in U.S. manufacturing, production, and innovation have been announced, reflecting global confidence in the United States as a destination for investment. This capital expenditure boom is made possible by the Administration's policies allowing full expensing of equipment and R&D, tariffs and reshoring incentives, and deregulation. The combined policies of the Trump Administration, both enacted and planned, provide a solid foundation for economic growth and will bring prosperity to all Americans.

Table 1 - Real Gross Domestic Product

_{Source. Bureau of Economic Analysis, Gross Domestic Product (Advance Estimate), Second Quarter 2026.}

Table 2 - Labor Market Indicators

_{Sources. Bureau of Labor Statistics, The Employment Situation - June 2026 ; Job Openings and Labor Turnover - May 2026.}

Table 3 - Inflation

_{Sources. Bureau of Labor Statistics, Consumer Price Index - June 2026. Bureau of Economic Analysis, Personal Income and Outlays, June 2026 .}

_{¹ For CPI, 12-month growth is not seasonally adjusted.
² Imputed from CPI Data.}