US economy grew faster than expected in Q2

The US economy surpassed expectations in the second quarter, growing at a rate of 2.4% on an annualised basis. Labor market resilience supported consumer spending, and businesses increased investment in equipment, potentially warding off fears of an imminent recession.

While the Department of Commerce’s advance second-quarter gross domestic product (GDP) report painted a picture of sustained domestic demand, it also showed a considerable slowdown in inflation during the same period. This led some economists to believe that the Federal Reserve may not need to raise interest rates beyond this year, opting instead to maintain borrowing costs at higher levels.

“The economy is more than resilient; solid second-quarter growth shows it has triumphed over the naysayers saying recession was inevitable,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

The 2.4% growth rate in GDP exceeded economists’ expectations, who had forecasted a 1.8% rate for the April-June period. Inflation also eased, with the price index for gross domestic purchases increasing at a 1.9% rate, down from 3.8% in the first quarter.

Consumer spending, a significant contributor to US economic activity, increased at a 1.6% pace, down from the robust 4.2% rate in the first quarter. However, it still added over a full percentage point to GDP growth. Spending on long-lasting manufactured goods slowed, but service-related expenditures compensated for the decline.

Consumer spending has been supported by accumulated savings during the pandemic, estimated at up to $2.1 trillion at one point. Strong wage gains and low unemployment have also contributed to the spending spree.

The labor market continues to show signs of resilience, with initial claims for state unemployment benefits falling to the lowest level since February. The jobless rate is expected to ease further this month.

Business investment also rebounded in the second quarter, particularly in equipment such as aircraft and motor vehicles. Efforts to bring semiconductor manufacturing back to the US have boosted factory construction, while nonresidential structures like factories have maintained robust investment.

Government spending and inventory investment contributed to GDP growth, but trade remained a drag after adding to growth for four consecutive quarters.

However, some economists remain concerned about a potential recession, arguing that higher borrowing costs could eventually hinder consumer spending financed by debt. Banks have been tightening credit, and excess pandemic savings are being depleted. Slowing job growth could also curb wage gains.

While the US economy showed strength in the second quarter, ongoing uncertainties related to inflation, interest rates, and consumer spending warrant close monitoring in the coming months. The path of economic recovery remains contingent on various factors, and analysts will be keeping a watchful eye on further developments.