Q2 2026 GDP Revised Up to 2.2% as Profit Margins Hit a Record

A bigger revision than forecasters expected

The U.S. economy grew faster in the spring than earlier reports showed. In its third estimate, released September 30, the Bureau of Economic Analysis put second-quarter 2026 real GDP growth at a 2.2% annual rate. That is 0.7 percentage point above the second estimate, and BEA attributed the increase mainly to higher readings for investment, consumer spending and government spending.1 The agency also raised first-quarter growth to 2.5%.1 Before this report, the quarter had been stuck at 1.5% in both the advance and second estimates.3

Wall Street was not expecting this. Analysts had forecast no change from the second estimate, so the revision beat consensus.8 The rest of the release told the same story. Real gross domestic income rose 2.6%, the average of GDP and GDI came in at 2.4%, and real final sales to private domestic purchasers grew 4.6%. All three were revised up.3

The report did more than revise one quarter. It also included BEA's 2026 annual update of the national accounts, which reworked data from the first quarter of 2021 through the first quarter of 2026. The same release delivered annual updates to state GDP, state personal income and state consumer spending.6 Revisions of that size mean older narratives about the economy need rechecking, and the inflation figures are where that matters most.

What drove growth, and what held it back

Consumer spending, investment and exports pushed GDP higher, while a rise in imports subtracted from the total.1 EY's breakdown shows how much trade cost the economy: imports grew 12.6% and exports 5.0%, so net trade took 1.1 percentage points off growth.7 Inventories took off another half point. Real final sales therefore rose 2.8%, which EY attributes to strong household spending and a surge in business investment tied to artificial intelligence.7

In my reading, the headline 2.2% understates how much private demand was running. When private final demand grows at 4.6% while GDP grows at 2.2%, a large share of that demand is being met by imports and by drawing down inventories rather than by domestic production. EY describes the economy as "robust but exposed" and says growth is concentrated in a small number of sectors and segments.7

Industry data point the same way. Real gross output rose 5.0% in the quarter, with private services-producing industries up 6.0% and goods producers up 3.0%.3 Measured by real value added, services-producing industries grew 2.5% and government contributed almost nothing.6 The annual update also reshaped the first quarter: goods-producing value added was cut by 3.0 percentage points to 1.5%, and services were raised by 1.3 points to 2.1%.6

Profits soared, and households are paying for it

Corporate America had an exceptionally strong quarter. Profits from current production rose $384.0 billion, although that is $16.9 billion less than the second estimate showed.1 The second estimate had put the gain at $400.9 billion, after a first-quarter increase of just $74.4 billion.5 According to EY, domestic nonfinancial companies accounted for $289 billion of the second-quarter gain, financial firms for $67 billion, and earnings from the rest of the world for $28 billion. EY also calculates that profit margins rose 0.9 point to 14.5% of GDP, an all-time high.7

The sources broadly agree that households are not sharing in this. EY expects most of the benefit of growth over the next year to go to profit margins and expects household income erosion to continue.7 The August personal income report released the same day backs that up. Inflation-adjusted disposable income was flat for the month, yet real spending jumped 0.6%, the largest monthly gain in more than a year.16 Nationwide's Kathy Bostjancic noted that households squeezed by prices are saving less or borrowing more. PNC's Gus Faucher called spending growth that outpaces income growth unsustainable and said it depends heavily on high-income households riding a strong stock market.16

That is why I read the upward GDP revision as less reassuring than the headline suggests. The quarter's strength came from spending that incomes are not keeping up with, and margins are growing faster than wages.

Inflation inside the GDP report

The price measures in the GDP release were very high. The PCE price index rose at a 5.0% annual rate in the second quarter, down from 5.3% in the second estimate. Core PCE, which excludes food and energy, ran at 3.3%, down from 3.6%. The gross domestic purchases price index rose 5.6%.3 Nominal GDP grew 8.5%, meaning more than half of the dollar increase in output reflected higher prices rather than more goods and services.1

The annual revisions lowered recent inflation readings. CNN reported that methodological changes cut July's year-over-year PCE inflation from 3.7% to 3.4%, and core from 3.3% to 3.0%. August then held at those revised levels: 3.4% headline and 3.0% core, the third straight month at 3.0% for core.16 August's headline figure was well below the 3.7% consensus forecast, a gap largely explained by the methodology change.15 Pantheon's Oliver Allen said the revised three-month annualized core PCE rate was 2% in August, compared with 3.1% before the revision. In his view, inflation momentum now looks less alarming.16

September CPI argues against reading too much into that

Two weeks later, consumer prices undercut that more hopeful view. The Bureau of Labor Statistics said the consumer price index rose 0.6% in September and 3.7% over the past year, up from 3.4% in August.18 Core CPI rose 0.3% for the month and 2.6% for the year, compared with 2.4% in August.18 Economists had expected 3.6% headline and 2.5% core, so both annual figures came in hot.1119

Energy explains most of the increase. Gasoline jumped 9.1% in September and accounted for more than half of the monthly rise in the index. Energy prices are up 20.4% from a year earlier, gasoline 34.2% and fuel oil 74.2%.18 Coverage ties the oil shock to the U.S.-Iran war that started in late February. CPI inflation had been easing at the start of 2026 before the strikes reversed that trend.11

The sources disagree on whether inflation is spreading beyond energy. Carson Group's Sonu Varghese pointed out that core CPI rose at a 3.7% annualized rate in September and called the inflation broad-based.11 CNBC's reporting adds that tariffs, AI data center construction and strong travel demand are all pushing prices up. Airfares are 22% higher than a year ago, and RBC found record monthly increases in prices for toys and other mostly imported recreational goods.17 On the other hand, food prices were flat in September, beef fell 1%, and egg prices are down 20.6% from a year earlier.19 Vanguard's Adam Schickling summed up the more cautious view: inflation is persisting in services because demand has held up so well, and bringing it down will take patience.19

Wholesale prices sided with the hawks. September's producer price index rose 1.3%, more than double the forecast and the largest monthly gain since March 2022. That pushed the annual PPI rate to 6.3%. Even excluding food, energy and trade services, producer prices rose 0.5%.13

Where PCE goes next

September PCE comes out October 29.14 Seven Wall Street estimates compiled by CNBC average a 0.32% monthly rise in core PCE, which would push the annual core rate to about 3.1%.13 The Cleveland Fed's nowcast is close to that, at 3.05% core and 3.60% headline year over year.12 That would reverse the decline in headline PCE inflation that the August revision produced.

One detail stands out. After the revisions, core PCE (about 3%) is now running above core CPI (2.6%), which is the opposite of the usual relationship.1618 It is too early to say how much of that comes from the new methodology and how much from the composition of price changes. Either way, it means the Fed's preferred gauge offers no relief that CPI doesn't.

The Fed, and the regional picture

Monetary policy has already shifted. The Fed raised its benchmark rate in September for the first time in three years.16 Chair Kevin Warsh has said that confidence inflation will return to 2% in a timely way is a test for holding off on further hikes. Mizuho's Alex Pelle wrote that the data give the Fed little reason to wait.13 After the September CPI report, market odds of a quarter-point hike jumped from 22.1% to 41.5%.19 Moody's Mark Zandi said the report supports continued rate increases.17

The state data show how unevenly the quarter's growth was spread. Real GDP rose in 44 states and the District of Columbia. New York led at 4.0% on the strength of finance and insurance, and West Virginia was weakest at -2.3% because of mining.23 Delaware and South Carolina each grew 3.5%. Alaska, Wyoming, North Dakota, Kansas and Nebraska all contracted. Personal income nationwide rose $314.3 billion, a 4.7% annual rate. Wisconsin was strongest at 6.4%, and North Dakota was the only state to decline, falling 4.2% as earnings dropped 9.3%.23 For 2025 as a whole, current-dollar consumer spending rose 5.3% and grew in every state.25 Florida posted the fastest increase.

The overall picture is not stagflation, given 2.2% growth and record profits, and it is not a soft landing either. Output is growing, but much of the gain is going to margins and is being financed by household borrowing and reduced saving, while an energy shock pushes prices up. EY expects growth above 4% annualized in the third quarter before the economy settles near 2%.7 If the October 29 advance estimate shows that, alongside a core PCE rate above 3%, the Fed will have stronger grounds to keep raising rates.1413