US economy expanded 2.8%, Fed on track to finally cut rates
The US economy grew faster than expected in the second quarter amid solid gains in consumer spending and business investment, but inflation pressures subsided, leaving intact expectations of a September interest rate cut from the Federal Reserve.
Growth last quarter also received a boost from inventory building as well as increased government spending, the Commerce Department’s advance report on second-quarter gross domestic product on Thursday showed.
The housing market recovery, however, regressed and was a small drag on the economy.
The trade deficit widened further, subtracting from GDP growth.
The economy continues to outperform its global peers, despite hefty rate hikes from the central bank in 2022 and 2023, thanks to a resilient labor market.
“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.”
Gross domestic product increased at a 2.8% annualized rate last quarter, the Commerce Department’s Bureau of Economic Analysis said in its advance estimate of second-quarter GDP.
Economists polled by Reuters had forecast GDP rising at a 2.0% rate.
Estimates ranged from a 1.1% rate to a 3.4% pace.
The economy grew at a 1.4% rate in the first quarter.
Central bank officials regard a 1.8% pace as the non-inflationary growth rate.
Still, growth was slower than the 4.2% pace logged in the second half of last year.
Consumer spending, which accounts for more than two-thirds of the economy, increased at around a 2.3% rate after slowing to a 1.5% pace in the January-March quarter.
Spending was driven by increased outlays on services like healthcare, housing and utilities as well as recreation.
Consumers also boosted outlays on goods, including motor vehicles and parts, recreational goods and vehicles, furnishings and durable household equipment as well as energy products.
Business investment picked up as spending on equipment surged at an 11.6% rate after rising at only a 1.6% pace in the first quarter.
Businesses also accumulated more inventory, which increased at a $71.3 billion rate after rising at a $28.6 billion pace in the prior quarter.
Solid domestic demand
Even discounting inventories, growth was solid last quarter, with domestic demand rising at a 2.6% pace.
The increase in final sales to private domestic purchasers matched the gain in the January-March quarter.
The rise in GDP growth bodes well for an acceleration in productivity, which would 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% rate after surging at a 3.7% pace in the first quarter, welcome news for central bank officials ahead of their two-day policy meeting next week.
The so-called core PCE price index is one of the inflation measures tracked by the Fed for its 2% target.
The government’s broadest gauge of prices in the economy, the gross domestic purchases price index, rose at 2.3% pace after jumping at a 3.1% rate in the January-March quarter.
The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for the past year.
It has hiked its policy rate by 525 basis points since 2022. Financial markets expect three rate cuts this year, starting in September.
Despite the solid economic growth pace, the outlook for the second half of the year is hazy.
The labor market is slowing, which will impact wage gains.
The saving rate is well below its pre-pandemic average and economists estimate that the bulk of the Fed’s rate hikes is still to be felt.
State and local government revenues are also slowing, which could erode spending.
There are also worries about new tariffs, which could see businesses front-loading imports if former President Donald Trump is returned to the White House in November’s presidential election.
Nonetheless, a recession is not expected, with monetary policy easing anticipated this year.
