The U.S. economic growth expanded at a faster-than-expected pace in the second quarter, driven by solid gains in consumer spending and business investment. However, inflation pressures appeared to be subsiding, leaving the door open for a potential interest rate cut by the Federal Reserve in September.
Factors driving economic growth
The economic growth was boosted by inventory building and increased government spending, according to the Commerce Department‘s advance report on second-quarter gross domestic product (GDP). The housing market recovery regressed and was a slight drag on the economy, while the widening trade deficit also subtracted from GDP growth.
Resilience in the face of concerns
The report alleviated concerns that the economic expansion was at risk of an abrupt end, which had been raised by the lackluster performance in the first quarter and in April. Despite the Federal Reserve’s interest rate hikes over the past year, the U.S. economy continues to outperform its global peers, thanks to a resilient labor market.
Prospects for an interest rate cut
“Economic growth is solid, not too hot and not too cold,” said Christopher Rupkey, chief economist at FWDBONDS. “Inflation looks to be going the Fed’s way and an easing of monetary restraint with an interest rate cut is likely in September.”
Stronger-than-expected Q2 GDP growth
GDP increased at a 2.8 percent annualized rate in the second quarter, double the 1.4 percent growth pace in the first quarter and exceeding the 2.0 percent rate forecast by economists. The growth rate in the first half of the year averaged 2.1 percent, half the 4.2 percent pace logged in the last six months of 2023, but still slightly above the non-inflationary growth rate viewed by the Federal Reserve.
Read more: U.S. inflation plunges to 3 percent, fueling bets on imminent Fed rate cuts
Consumer spending and business investmentÂ
Consumer spending, which accounts for more than two-thirds of the economy, increased at a 2.3 percent rate, driven by higher outlays on services and goods. Wage gains helped support consumer spending, with the labor market steadily improving, as indicated by a drop in initial claims for state unemployment benefits.
Business investment also picked up, with spending on equipment, mostly aircraft, surging at an 11.6 percent rate. Businesses also accumulated more inventory, which added 0.82 percentage point to GDP growth.
Underlying economic strength
Even excluding the impact of inventories, trade, and government spending, domestic demand was solid last quarter, rising at a 2.6 percent pace. This strength in the underlying economy was welcomed by Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, who said, “The U.S. economy is much stronger than people realize.”
Inflation and productivity
The rise in GDP growth bodes well for a pick-up in productivity, which could slow the pace of increase in labor costs and ultimately price pressures. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased at a 2.9 percent rate, slightly above expectations but still trending lower.
For more economy news, click here.
