By Lucia Mutikani
WASHINGTON (Reuters) – The U.S. economy grew faster than expected in the second quarter as a resilient labor market supported consumer spending, while businesses boosted investment in equipment and built more factories, potentially keeping a much-feared recession at bay.
Despite the broad-based acceleration in growth reported by the Commerce Department on Thursday, inflation subsided considerably last quarter, with one of the key measures tracked by the Federal Reserve for its 2% target posting its slowest increase in more than two years.
Economists, some of whom have been forecasting a recession since 2022, believed the U.S. central bank’s fastest interest rate hiking cycle since the 1980s was drawing to a close, though strong domestic demand could see it keeping borrowing costs higher and for longer.
The Fed on Wednesday raised its policy rate by 25 basis points to the 5.25%-5.50% range.
“Despite the Fed’s campaign to slow growth and snuff out inflation, no recession is in sight,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “Stop raising rates for now.”
Gross domestic product increased at a 2.4% annualized rate last quarter, the government said in its advance estimate of second-quarter GDP. The economy grew at a 2.0% pace in the January-March quarter. Economists polled by Reuters had forecast GDP would rise at a 1.8% rate in the April-June period.
The government’s measure of inflation in the economy, the price index for gross domestic purchases, rose at a 1.9% rate, the slowest in three years. This followed a 3.8% pace of increase in the first quarter.
Even more encouraging, the personal consumption expenditures price index (PCE) excluding food and energy advanced at a 3.8% rate. That was the smallest gain since the first quarter of 2021 and was a slowdown from the 4.9% pace logged in the January-March quarter. The Fed watches the PCE price indexes for monetary policy.
“It may be too soon to talk about Goldilocks, but there have been some favorable supply-side developments lately that could have legs,” said Michael Feroli, chief U.S. economist at JPMorgan in New York.
Outside housing and manufacturing, the economy has largely weathered the 525 basis points in rate hikes from the Fed since March 2022. Most economists are now confident the “soft landing” scenario – in which inflation falls, unemployment remains relatively low and a recession is avoided – is feasible.
President Joe Biden said the GDP report was evidence that his economic plan was working. “We’re just getting started,” the Democratic president said in a statement.
Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
BROAD-BASED GROWTH
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 1.6% pace in the second quarter. Though the pace slowed from the first quarter’s robust 4.2% rate, it was enough to add more than a full percentage point to GDP growth.
Households stepped up purchases of recreational goods and vehicles, but cut back on automobiles and clothing. They spent more on services like housing and utilities, airline travel as well as motor vehicle maintenance and repair services.
There were also increases in spending on financial services, mostly portfolio and investment advice, and insurance.
Spending is being propped up by excess savings accumulated during the COVID-19 pandemic and debt. While job growth has cooled from last year’s rapid pace, wage gains remain strong.
Income at the disposal of households after adjusting for inflation rose at a 2.5% rate after surging at a 8.5% pace in the first quarter. The saving rate rose to 4.4% from 4.3%.
Labor market tightness persisted early in the third quarter as companies hoard workers after struggling to find labor during the coronavirus pandemic.
A separate report from the Labor Department showed initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 221,000 for the week ended July 22, the lowest level since February. Economists had forecast 235,000 claims for the latest week.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, dropped 59,000 to 1.690 million during the week ending July 15, the lowest level since January. The historically low so-called continuing claims suggest some laid-off workers are quickly finding employment.
The continuing claims data covered the week that the government surveyed households for July’s unemployment rate.
Continuing claims fell between the June and July survey periods. This together with a Conference Board survey on Tuesday showing consumers upbeat about the labor market in July suggests the unemployment rate likely eased this month. At 3.6% in June, the jobless rate was not too far from multi-decade lows.
Last quarter, business investment accelerated after almost stalling in the January-March period as spending on equipment rebounded after two straight quarterly declines.
There were increases in outlays on equipment like aircraft, trucks, buses and truck trailers.
Efforts by the Biden administration to bring semiconductor manufacturing back to the United States are boosting factory construction. Investment in nonresidential structures like factories remained robust last quarter.
“The need to address supply shortages across the economy has supported robust construction activity, prevented a severe manufacturing pullback, and helped price and wage pressures ease,” said Gregory Daco, chief economist at EY-Parthenon in New York.
Government spending added to growth. Inventory investment provided a small lift, but trade was a drag after contributing to growth for four straight quarters.
Residential investment, which includes homebuilding, contracted for the ninth straight quarter.
A measure of domestic demand increased at a 2.3% rate after surging at a 3.2% pace in the first quarter.
But headwinds remain. Wage growth is slowing as the employment gains cool. Higher borrowing costs could eventually make it harder for consumers, especially low-income households, to fund spending with debt. Banks are tightening credit and excess savings continue to be run down.
“We still expect the economy to slow and enter a mild recession at the turn of the year,” said Daniel Vernazza, chief international economist at UniCredit in London.
(Reporting by Lucia Mutikani; Editing by Nick Zieminski, Andrea Ricci and Paul Simao)
