U.S. Economy Expands Better Than Expected in Q2
The Bureau of Economic Analysis recently released its second estimate of the U.S. economy’s performance in the second quarter, revealing that the economy expanded better than initially reported. The real gross domestic product (GDP) growth rate from April to June was 3 percent, up from last month’s preliminary estimate of 2.8 percent. This growth was higher than the previous quarter’s expansion of 1.4 percent.
One of the main factors behind this upward revision was consumer spending, which rose by 2.9 percent. In the advance estimate, consumer spending had increased by 2.3 percent. This increase in consumer spending contributed 1.95 percent to the final reading of the GDP percentage. Nonresidential fixed investment, private inventory investment, and government consumption also played a role in accelerating the overall GDP growth.
Imports were revised up to 7 percent, while exports edged up to 1.6 percent. The second-quarter non-inflation-adjusted GDP soared by 5.5 percent, reaching $28.65 trillion.
Mixed Inflation and Consumer Outlook
In terms of inflation, the GDP price index, which measures the prices of goods and services produced in the United States, jumped by a higher-than-expected 2.5 percent. However, this was down from 3.1 percent in the first three months of the year. Personal consumption expenditures (PCE) prices and core PCE, which excludes volatile sectors like energy and food, increased by a smaller-than-expected rate of 2.5 percent and 2.8 percent, respectively.
Regarding the state of the consumer, current-dollar personal income was adjusted downward to $233.6 billion, while real disposable personal income remained unchanged at a 1 percent increase. The personal savings rate was also revised lower to 3.3 percent.
Corporate profits, on the other hand, rose by 1.7 percent in the second quarter, marking a turnaround from the 2.7 percent decline in the previous quarter.
Market Reactions and Economic Outlook
Following the release of the GDP data, U.S. stocks posted gains before the opening bell, with benchmark indexes swelling by as much as 0.7 percent. U.S. Treasury yields also saw an increase, with the benchmark 10-year yield rising to 3.87 percent.
Despite recession signals flashing red, various estimates suggest that the United States will likely avoid an economic downturn in 2024. The Federal Reserve Bank of Atlanta’s GDPNow model estimate predicts a 2 percent expansion for the third quarter, while the New York Fed Staff Nowcast and the St. Louis Fed Economic News Index forecast growth rates of 1.9 percent and 1.7 percent, respectively.
Economists point to strong retail sales, falling jobless claims, robust restaurant bookings, solid air travel, high hotel occupancy rates, accelerating bank credit growth, declining bankruptcy filings, and steady credit card spending as indicators that there are no signs of a recession in the incoming data. Consumer confidence has also risen, and expectations of a recession within the next 12 months are lower than in previous years.
With inflation stabilizing and the Federal Reserve beginning to cut interest rates, there is a real possibility of avoiding a recession. However, the key driver for the markets in the coming months will be the Fed’s policy. The size and pace of rate cuts will depend on the data, the evolving outlook, and the balance of risks.
The next Federal Open Market Committee policy meeting is scheduled for September 17 and 18, where the market expects the first rate cut in the easing cycle to take place. The debate among market watchers revolves around the extent and timing of the institution’s reductions in the months ahead. Federal Reserve Chairman Jerome Powell has emphasized that the institution’s actions will be data-dependent.
