The US Department of Commerce disclosed on Thursday that the actual GDP growth rate for the second quarter was 2.4% on an annual basis, outpacing the first quarter's 2% and greatly exceeding the market forecast of 1.8%.
Simultaneously, Personal Consumption Expenditures (PCE) increased by 1.6% year-on-year. Despite a drop from the previous 4.2%, it significantly exceeded the market's prediction of 1.2%.
Inflation also notably decelerated. The PCE price index, closely watched by the Federal Reserve, rose 2.6% in the second quarter, significantly slowing from its previous 4.1%. The core PCE price index, which excludes food and energy, increased by 3.8%, lower than its previous 4.9%, similarly showing a substantial slowdown and falling slightly below economists' predictions.
The Q2 GDP data is the first crucial economic data released after yesterday's FOMC meeting.
Since the Fed stated it would continue to "rely on the data," future economic growth and inflation data are essential for monetary policy. Positive data could provide additional support for the US dollar index.
Recession Receding, Economists Anticipate a Soft Landing
The aforementioned data indicates that the US economy is functioning well. Robust consumer spending, which contributes up to two-thirds of the US economy, successfully prevented a slide into the recession widely predicted by economists last year, amid easing inflation and tight labor markets.
After announcing an expected rate hike yesterday, Federal Reserve Chairman Jerome Powell said that monetary policy is moving closer to its 2% inflation target, requiring only time for transmission. He predicts that the US economy might start "slowing noticeably" later this year, but it won't sink into a "serious recession causing massive unemployment."
In its GDP report, the Department of Commerce stated that the second quarter's economic growth reflected increased consumer spending, business capital expenditure, and private-sector inventory buildup. A decline in US exports was a drag on economic growth.
Ernst & Young's Chief Economist, Gregory Daco, wrote in a recently published GDP forecast report that the overall resilience of the labor market, the moderation of inflation, and the slowdown in final demand growth offer hope for a soft landing for the economy. As overall inflation cools down rapidly, real wage growth has turned positive, prompting consumer spending to continue to rise.
Consumer Spending Fuels Economic Growth, But the Pace is Slowing
The GDP report also showed that US consumer spending had declined somewhat in the second quarter compared to the previous one.
Consumer spending in the second quarter grew by 1.6% year-on-year, accounting for 68% of all economic activity, marking a substantial slowdown from the previous quarter's 4.2%.
Due to high interest rates, cars, appliances, and other items that Americans often finance became more expensive. Additionally, after a three-year hiatus, student loan repayments in the US are set to resume later this year. Many signs suggest that the savings Americans accumulated during the pandemic lockdowns have been nearly depleted. Even though unemployment remains low, job growth and wage growth have been slowing.
T. Rowe Price's chief US economist, Blerina Uruci, told The New York Times that all these factors supporting consumer spending aren't as strong anymore. In my view, a hard landing has been delayed, not disappeared.
The GDP report also highlighted the extensive damage high interest rates have caused to the US real estate industry. An increase in mortgage loan rates has significantly slowed US home sales. In the past few quarters, real estate has been a drag on US economic growth, with residential investment simultaneously slowing. In the second quarter of this year, US residential investment shrank by 4.2% year-on-year, roughly equivalent to the previous quarter's contraction.
Furthermore, it's worth noting that consumer spending wasn't the only factor supporting the US economy in the second quarter. Non-residential fixed investment (business spending on new buildings, equipment, etc.) grew by 7.7% year-on-year, a significant rise from the previous quarter's 0.6%.
