The US economy grows in the second quarter despite the Fed’s rate hikes
The US economy grew 2.1% annually from April to June and has continued to show resilience amid higher borrowing costs for consumers and businesses, the government said on Wednesday, downgrading its original estimate.
The government previously estimated that the economy grew at an annual rate of 2.4% in the most recent quarter.
The Commerce Department’s second growth estimate last quarter marked a slight acceleration from a 2% annual growth rate from January to March.
Although the economy has been slowed by the Federal Reserve’s vigorous efforts to stem inflation through interest rate hikes, it has managed to continue to expand, with employers still hiring and consumers continuing to spend.
The report on the country’s gross domestic product — the total production of goods and services — released on Wednesday showed growth in the latest quarter was driven by a surge in consumer spending, business investment and state and local government spending.
A measurement of consumer prices in the report also showed a slowdown in inflation, which could ease pressure on the Fed to raise interest rates further.
“Slower growth and weaker inflation is good news for the Federal Reserve,” said Eugenio Aleman, chief economist at Raymond James.
Consumer spending, which accounts for about 70% of the U.S. economy, grew 1.7% annually in the April-June quarter — a decent increase, albeit less than 4.2% in the first three months of 2023. Excluding real estate investments and business investment grew at a strong annual rate of 6.1% in the most recent quarter.
Residential investment fell in the second quarter as it was impacted by higher mortgage rates.
The US economy – the world’s largest – has shown surprising resilience amid the Fed’s aggressive campaign to stem a rebound in inflation, which hit a four-decade high last year.
Since March of last year, the Fed has raised interest rates 11 times, making borrowing for everything from cars to homes to business expansion significantly more expensive and prompting widespread predictions of an impending recession.
Since peaking at 9.1% in June 2022, inflation has been falling more or less steadily year-on-year.
Last month it was 3.2% – a significant improvement, albeit still above the Fed’s inflation target of 2%.
Excluding fluctuating food and energy costs, July’s so-called core inflation was the same as inflation the smallest monthly increase in almost two years.
A price measure in the GDP report — the personal consumption expenditure index — rose at a 2.5% annual rate last quarter, compared with 4.1% in the January-March quarter and the smallest increase since late 2020.
Since the Fed began raising rates, the economy has been supported by a consistently healthy job market.
Employers have added an average of 258,000 jobs per month this year, although that average has slowed to 218,000 over the past three months.
On Tuesday, a government report provided further evidence that the labor market is gradually weakening: it showed that employers published significantly fewer job vacancies in July and that the number of people quitting their jobs had fallen for the second straight month. (If fewer people are quitting their jobs, it usually indicates they are less confident about finding a new job.)
Nevertheless, job vacancies are still well above pre-pandemic levels.
At 3.5%, the country’s unemployment rate is still just above its half-decade low.
And when the government releases the August jobs report on Friday, economists polled by data firm FactSet expect it will show that while hiring has fallen, employers have still added 170,000 jobs.
The combination of falling inflation, sustained economic growth and slower but steady hiring has raised hopes of a rare soft landing.
In this scenario, the Fed manages to fight high inflation without triggering a painful recession.
Wednesday’s government report, the second of three estimates of last quarter’s growth, will be followed by a final calculation late next month.
