The US economy displayed stronger-than-expected growth in the second quarter, driven by consumer spending supported by a robust labor market, and increased business investments in equipment. This positive economic performance is believed to stave off concerns of an imminent recession.
US Economy Surges in Q2
The Department of Commerce’s advance second-quarter gross domestic product (GDP) report painted a picture of sustained domestic demand strength, but it also revealed a considerable decline in inflation during the last quarter. Economists speculate that the Federal Reserve may not need to raise interest rates further this year and might instead maintain higher borrowing costs for some time. The US central bank recently raised its policy to a range of 5.25 percent to 5.5 percent.
According to Christopher Rupkey, the chief economist at FWDBONDS in New York, the economy has triumphed over the skeptics who predicted an inevitable recession following inflation shocks and the Fed’s aggressive rate stance to combat it.
In Q2, GDP increased at an annualized rate of 2.4 percent, up from the 2 percent growth rate in the preceding January-March quarter. Economists had predicted a GDP rise of 1.8 percent for the April-June period.
Inflation, as measured by the price index for gross domestic purchases, slowed to a 1.9 percent rate, down from the 3.8 percent rate in the first quarter. Excluding food and energy prices, the increase was 2.6 percent, compared to the 4.2 percent rate in Q1.
The US economy, apart from the housing market and manufacturing, has managed to withstand the 525 basis points in rate hikes initiated by the Fed since March 2022, as the central bank focuses on combating inflation.
Initially, economists had predicted a downturn since late 2022, but with price pressures easing, some now believe the Fed’s envisioned soft-landing scenario for the economy could be feasible.
Consumer spending, which accounts for over two-thirds of US economic activity, increased at a 1.6 percent pace. Although the growth rate was slower than the robust 4.2 percent rate in Q1, it still contributed over one percentage point to the GDP growth. While spending on durable goods has slowed post the COVID-19 boom, spending on services has picked up.
Consumer spending has been bolstered by accumulated excess savings during the pandemic, estimated to be as high as $2.1 trillion at one point, strong wage gains from a tight labor market, and increased debt. Companies have been holding onto their workers after struggling to find labor during the pandemic.
A report from the Department of Labor showed a decline in initial claims for state unemployment benefits, reaching the lowest level since February. The data suggests that some laid-off workers are swiftly finding new employment, indicating a positive trend in the job market.
Despite employment in the leisure and hospitality sector remaining below pre-pandemic levels, continuing claims, a proxy for hiring, remain low by historical standards.
The economy witnessed a boost in business investments, particularly in equipment, after nearly stalling in the first quarter. Efforts to bring semiconductor manufacturing back to the US have contributed to increased factory construction. Additionally, investments in nonresidential structures like factories remained robust, further enhancing the economy’s resilience.
Government spending also played a significant role in contributing to GDP growth, along with a boost from inventory investment. However, trade acted as a drag, reversing the previous four quarters of growth.
On the other hand, residential investment, including homebuilding, declined for the ninth consecutive quarter. Despite this, a measure of domestic demand increased at a solid 2.3 percent rate after a surge of 3.2 percent in the first quarter.
While some economists remain convinced that a recession is on the horizon, citing concerns that higher borrowing costs will eventually hinder consumer spending fueled by debt, the overall economic outlook remains positive with strong indicators of growth and resilience.