The U.S. economy grew at an annualized rate of 3% in the second quarter of 2024, continuing its steady expansion in the face of high interest rates, according to the latest figures from the Bureau of Economic Analysis. The third estimate of second-quarter gross domestic product (GDP), released on Thursday, confirmed the earlier reading, showing a stronger-than-expected performance despite ongoing global uncertainties. The 3% growth rate exceeded the initial first-quarter pace of 1.6%, indicating the resilience of the economy as it navigates elevated inflation and other macroeconomic challenges.
"The revisions only strengthen our conviction that the U.S. economy will continue to expand at a decent pace over the coming year," said Michael Pearce, deputy chief economist at Oxford Economics. Pearce added that the solid pace of growth suggests labor market conditions are unlikely to deteriorate significantly, bolstering expectations that the economy can maintain its current trajectory.
Key drivers of this growth included non-durable goods manufacturing, finance, and healthcare sectors. In contrast, industries like food services, educational services, and mining posted weaker results, detracting from the overall GDP figure. Despite these sectoral differences, corporate profits soared in the second quarter, rising by $132.5 billion. Adjusted for inventories and capital use, profits from domestic non-financial corporations surged by $79.6 billion to $108.8 billion, reflecting the strong rebound in business activity post-pandemic.
"The labor market remains in a strong place, and inflation is coming down," Federal Reserve Chair Jerome Powell remarked after the central bank's decision last week to cut interest rates by 50 basis points. Powell emphasized the Fed's commitment to keeping the labor market robust, noting that the rate cut was aimed at preserving the economy's growth momentum. Despite the challenges, Powell reiterated that the economy is "growing at a solid pace."
Thursday's release of the GDP data also came alongside positive news from the U.S. Labor Department, which reported that 218,000 unemployment claims were filed in the week ending September 21. This number came in below Wall Street's expectations of 223,000, marking the lowest level of jobless claims since mid-May. The decline in unemployment claims further underscores the strength of the U.S. labor market, providing additional support for the Federal Reserve's cautious approach to monetary policy.
Corporate America, meanwhile, continues to see robust profits, contributing to the overall economic growth. The surge in corporate profits comes at a time when businesses are navigating both rising operational costs and an uncertain global economic outlook. Yet, despite these hurdles, corporate profits have risen significantly, indicating a positive outlook for the private sector.
However, the GDP figure also reflected some areas of weakness. While inventory investments and government spending saw upward revisions, there were reductions in exports and fixed investments, which could temper optimism about the strength of external demand. The decline in exports is particularly concerning, given that trade is a critical component of the U.S. economy. As global trade tensions and supply chain disruptions continue, the U.S. may face headwinds in sustaining the current pace of growth.
In terms of forward-looking projections, economists expect the U.S. economy to maintain solid growth in the third quarter. The Atlanta Federal Reserve's GDPNow tracker currently projects annualized growth of 2.9% for the third quarter, while Goldman Sachs' economists are predicting a similar 3% growth rate. Both estimates suggest that the economy is not only stable but also resilient to external pressures, such as global inflationary trends and geopolitical risks.
Nevertheless, economists like Paul Donovan from UBS have expressed caution regarding the U.S. Federal Reserve's data dependency in shaping monetary policy. Donovan highlighted the increased frequency and size of data revisions, which he believes could lead to uncertainty in policy decisions. "The increased frequency and size of data revisions underscore the dangers of 'data dependency' in driving policy," Donovan wrote in a Thursday commentary. His warning comes as central banks, including the Fed, face the challenge of balancing inflation control with economic growth.
Looking ahead, the Federal Reserve's upcoming policy decisions will remain crucial in determining the future path of the U.S. economy. While the strong second-quarter performance has calmed fears of an imminent downturn, the Fed will have to navigate carefully, particularly as markets await the next interest rate decision in November.
