U.S. Quarterly Economic and Market Update: What BACCF Members Should Watch in the Second Half of 2026
The U.S. economy slowed over the quarter. Real GDP rose at a 1.5% annualized rate in the second quarter of 2026, according to the Bureau of Economic Analysis advance estimate, down from 2.1% in the first quarter. Consumer spending picked up over the period, but softer business investment and exports, together with a decline in government spending, pulled the headline lower. Much of that government drag reflected federal oil sales from the Strategic Petroleum Reserve rather than a genuine cut in outlays, so the underlying picture is better described as steady but cooling than as a sharp downturn.
Reading the quarter's data requires some care. The conflict involving Iran, the United States, and Israel that began in late February, and the resulting disruption to shipping through the Strait of Hormuz, drove energy prices sharply higher into the spring before they eased in June. That swing distorted several monthly readings on inflation, retail sales, and industrial output, which are better viewed through the lens of the energy cycle than taken at face value.
Trade policy and the Brazil-U.S. corridor
At the direction of the President, the U.S. Trade Representative pursued a dedicated action against Brazil under Section 301 through the quarter. On June 1 the USTR determined that a range of Brazilian practices were unreasonable and actionable, and it proposed a 25% tariff on most Brazilian goods. The practices at issue span digital trade and electronic payment services, preferential tariffs, anti-corruption enforcement, intellectual property protection, ethanol market access, and enforcement against illegal deforestation. Consultations with Brazilian officials had taken place in mid-April, and a public comment period and hearing followed in early July. The measure was finalized in mid-July and took effect on July 22, applying an additional 25% duty to most products of Brazil.
The scale of the corridor is what makes this matter. U.S. goods trade with Brazil totaled an estimated $94.3 billion in 2025, so a 25% duty on most Brazilian goods touches a substantial flow of industrial inputs, consumer goods, agricultural products, and the logistics that move them. Members on both sides of the corridor should expect a direct effect on landed costs, sourcing choices, and contract terms.
Brazil | United States Trade Representative
A note on the broader tariff picture. A separate, temporary 10% surcharge applied to most imports for much of the quarter under Section 122 authority and lapsed on July 24. Its legal standing was contested in the courts throughout, but for business-planning purposes the practical points are simpler: that broad surcharge is now gone, and policy is shifting toward a narrower, country- and sector-specific approach, of which the Brazil action is the clearest example. The direction of travel — more targeted, more frequently changing duties — is the part worth planning around.
What the tariff changes mean for BACCF members
The effects tend to show up in four places.
Prices. Higher duties raise the cost of imported goods. With the 25% duty now applied to Brazilian products and a 10% general surcharge in place for most of the quarter, input costs are rising for a widening set of goods, adding to the goods-price pressure the Federal Reserve has flagged. Some of this eventually reaches consumers.
Supply chains. Companies may re-source inputs, change logistics routes, or hold more inventory to manage the uncertainty. For firms tied to Brazilian sourcing, the July tariff is a reason to review supplier arrangements and entry timing directly.
Margins. Where higher costs cannot be passed through fully, profitability compresses. This is most acute in low-margin, import-intensive activities and in businesses closely linked to Brazilian goods.
Sector exposure. Outcomes will be uneven. Any product-specific carve-outs in the Brazil action, and the exemptions that applied under the general surcharge, will determine which categories absorb the largest increases. Agricultural inputs, ethanol, and selected manufacturing lines are among the most exposed along this corridor.
Monetary policy. Monetary policy remains a central market variable, and the tone shifted this quarter. The Federal Reserve held the federal funds target range at 3.50% to 3.75% at both of its second-quarter meetings, keeping the benchmark unchanged for all of 2026 so far. The June meeting was the first chaired by Kevin Warsh, and the projections leaned more hawkish: the median expectation for the year-end rate moved up to about 3.8% from 3.4% in March, and the statement dropped earlier language that had implied a bias toward cuts. In effect, the Committee is now signaling that its next move is at least as likely to be a hike as a cut, with markets pricing a possible 25-basis-point increase later in the year. Rate expectations will stay highly sensitive to incoming inflation and labor-market data.
Inflation. Price pressures firmed in the middle of the quarter and then eased. Headline CPI rose 3.8% year over year in April, climbed to 4.2% in May — the highest reading in more than two years, driven almost entirely by energy — and fell back to 3.5% in June as the ceasefire pulled gasoline prices lower. The monthly decline in June was the largest since early 2020. Core CPI, which excludes food and energy, was steadier, easing to 2.6% in June from 2.9% in May. The April PCE index, the Fed's preferred gauge, stood at 3.8% with core PCE at 3.3%, a reminder that underlying inflation remains above target even as the energy spike unwinds.
Consumer spending. The consumer held up reasonably well. Retail and food-services sales rose about 1.0% in May, helped by higher gasoline receipts, then increased 0.2% in June to $768.6 billion, up 6.7% from a year earlier; for the April-through-June period, sales were up 6.4% year over year. Stripping out gasoline, June sales rose a firm 0.7%, with gains in autos, non-store retailers, and electronics. Because these figures are not adjusted for inflation, real spending was softer than the nominal totals suggest, and elevated prices continued to weigh on household purchasing power.
Manufacturing. Industrial activity started the quarter strongly and then lost momentum. Total industrial production grew at roughly a 4% annual pace in the second quarter, with manufacturing up about 4.7%, but nearly all that strength came from a sharp increase in April; output was essentially flat by June. Capacity utilization stayed below its long-run average, around 76%, which points to remaining slack and continued sensitivity to trade costs and demand. Manufacturers cited rising energy input costs and tariff uncertainty repeatedly as pressures on margins, and the USMCA framework, now subject to annual review, adds a further layer of uncertainty for cross-border supply chains.
Labor market. The clearest turn this quarter came in employment. Payroll growth cooled from stronger spring readings to just 57,000 in June, well below expectations, with downward revisions to April and May. The unemployment rate dipped to 4.2%, but largely because fewer people were looking for work rather than because hiring accelerated, as participation fell to its lowest level since early 2021. Wage growth held at about 3.5% year over year. Taken together, the labor market looks like it has turned a corner toward slower growth without yet signaling outright weakness.
Implications for BACCF members and investors
- Trade policy is now the primary planning variable: the new 25% duty on Brazilian goods and the shift away from the broad Section 122 surcharge warrant a direct review of sourcing, pricing, and contract terms in the corridor.
- Growth is cooling: second-quarter GDP slowed to 1.5% from 2.1%, and hiring weakened noticeably by June, which argues against assuming the recent pace will simply continue.
- Rates outlook: with policy held at 3.50%-3.75% and the Fed's projections now tilted toward a possible hike, inflation and labor data will drive expectations, and the easing bias markets grew used to in 2025 is gone.
- Fixed income: a modestly positive yield curve continues to support income-oriented positioning, though renewed energy or tariff-driven inflation surprises could still generate short-term volatility.
- Equities: an emphasis on quality — pricing power and balance-sheet strength — remains appropriate when input costs and trade frictions are rising.
Implications for general U.S. investors
Asset allocation. The quarter's mix — growth cooling to 1.5%, an energy-driven inflation scare that faded, a more cautious Fed, and a fresh layer of trade risk — argues for balance. A practical stance for general investors is to keep strategic diversification, favor quality, and avoid overreacting to any single data point, particularly the month-to-month swings the energy cycle produced this spring.
Short outlook and key risks for next quarter
Looking into the second half of the year, the variables to monitor are inflation persistence once the energy swing washes out, the pace of labor-market cooling, and how the 25% Brazil tariff plays through the corridor now that the general surcharge has lapsed. For BACCF members, the practical question is not whether uncertainty exists but how quickly the new trade costs begin to change planning assumptions on sourcing, pricing, and where to place the next dollar of investment.
The conflict in the Middle East remains the largest external risk. The late-February escalation and the effective closure of the Strait of Hormuz removed a large share of seaborne oil from the market and pushed crude sharply higher into the spring, in what the International Energy Agency described as one of the largest supply disruptions in the history of the oil market. A two-week ceasefire in early April brought only a brief pause; the more durable relief came with a memorandum of understanding in mid-June, after which shipping through the strait began to recover and energy prices fell back — the main reason inflation eased in June. That calm did not hold: fighting resumed in early July following attacks on commercial vessels, and the situation was unresolved as of this report's cutoff. Any renewed disruption would feed quickly back into energy prices, inflation, and the rate outlook, with direct consequences for the commodity-linked businesses many members operate.
