U.S. Economy Exceeds Expectations in Q2


The U.S. Economy Exceeds Expectations in Q2

The U.S. economy has experienced a growth rate of 2.4% in the second quarter, surpassing both the first-quarter growth of 2% and consensus expectations of 1.5%. However, a closer look reveals that the overall economic activity is not as robust as the headline number suggests, primarily due to decelerating growth in consumer spending.

Consumer Spending Takes a Hit

Despite the positive GDP growth, there has been a significant slowdown in consumer demand, which accounts for two-thirds of GDP. Personal consumption expenditures grew by only 1.6% in the quarter compared to the strong growth of 4.2% seen in the first quarter. Americans have been spending more on services rather than goods during this period.

Caution and Selectivity in Consumer Behavior

According to Gregory Daco, chief economist at Ernst & Young’s global strategy consulting arm, consumers are still willing to spend but have become increasingly cautious and selective. This change in behavior is attributed to high prices and tighter credit conditions. Consequently, consumer spending momentum has slowed down after an initially strong start to the year.

Impact on the U.S. Economy

Despite the softening consumer demand, the current GDP report suggests that the U.S. economy is heading towards a “soft landing.” This scenario involves a moderation of inflation without a significant economic downturn. However, it is unlikely to influence the Federal Reserve’s approach to managing inflation.

Federal Reserve’s Stance on Taming Inflation Remains Steady

Federal Reserve Chair Jerome Powell emphasized at Wednesday’s Federal Open Market Committee briefing that future monetary-policy decisions will be “data dependent.” The GDP report serves as a crucial data point in this ongoing discussion. Additionally, the release of the July jobs report and the quarterly employment cost index on Friday will further contribute to shaping the Federal Reserve’s approach.

The Changing Business Landscape

In the latest GDP report, an interesting trend has emerged: while consumers remained cautious at the start of the year, businesses have started to open up their wallets. Nonresidential fixed investments, which encompass commercial real estate and equipment spending, saw a healthy increase of 7.7% during the second quarter. This is a significant improvement from the mere 0.6% growth seen in the first three months of 2023.

This surge in business spending can be attributed to a renewed sense of optimism about the U.S. economic outlook. During second-quarter earnings calls, CEOs such as James Quincey of Coca-Cola and Michael Hsu of Kimberly-Clark noted positive developments. Quincey highlighted the moderation of inflation, while Hsu mentioned that costs had stabilized. Even Goldman Sachs CEO David Solomon expressed cautious optimism, acknowledging the progress made by the Fed in combatting inflation and the resulting increase in positive sentiment about the future trajectory of the economy.

Government spending also experienced a solid increase in the three months ending in June, albeit at a slightly slower pace compared to previous quarters. Overall spending rose by 2.6%, with federal outlays increasing by 0.9% and state and local outlays gaining 3.6%. This is partially attributed to continued growth in infrastructure spending, which has been a driving force behind economic expansion.

While business investment remains positive, consumer spending is expected to be more subdued this year. Tight credit conditions and reduced excess savings have hindered Americans’ purchasing power. Additionally, the resumption of student loan repayments and increasing debt burdens serve as headwinds to consumer spending. Economist Daco predicts that consumer spending will only see modest growth of 1.9% overall in 2023 and a muted increase of 0.8% in 2024.

It is important to note that Thursday’s GDP report is only a preliminary estimate, and a more refined estimate of second-quarter economic activity will be released on Aug. 30.

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