The United States economy surprisingly accelerated to a 2.4 per cent annual growth rate from April through June, showing continued resilience in the face of steadily higher interest rates resulting from the Federal Reserve’s 16-month-long fight to bring down inflation.
Thursday’s estimate from the US Commerce Department indicated that the gross domestic product – the economy’s total output of goods and services – picked up from the two per cent growth rate in the January-March quarter. Last quarter’s expansion was well above the 1.5 per cent annual rate that economists had forecast.
Driving last quarter’s growth was a burst of business investment. Excluding housing, business spending surged at a 7.7 per cent annual rate, the fastest such pace since early 2022. Companies ploughed more money into factories and equipment. Increased spending by state and local governments also helped fuel the economy’s expansion in the April-June quarter.
Consumer spending, the heart of the nation’s economy, was also solid last quarter, though it slowed to a 1.6 per cent annual rate from a robust 4.2 per cent pace in the first quarter of the year.
Investment in housing, though, fell, weakened by the weight of higher mortgage rates.
“This is a strong report, confirming that this economy continues to largely shrug off the Fed’s aggressive rate increases and tightening credit conditions,” said Olu Sonola, head of US economics at Fitch Ratings. “The bottom line is that the US economy is still growing above trend, and the Fed will be wondering if they need to do more to slow this economy.”
In fighting inflation, which last year hit a four-decade high, the Fed has raised its benchmark rate 11 times since March 2022, most recently on Wednesday. The resulting higher costs for a broad range of loans – from mortgages and credit cards to auto loans and business borrowing – have taken a toll on growth.
Still, they have yet to tip the United States into a widely forecast recession. Optimism has been growing that a recession isn’t coming after all, that the Fed can engineer a so-called ‘soft-landing’ – slowing the economy enough to bring inflation down to its 2.0 per cent annual target without wrecking an expansion of surprising durability.
This week, the International Monetary Fund upgraded its forecast for US economic growth for all of 2023 to 1.8 per cent. Though that would be down from 2.1 per cent growth for 2022, it marked an increase from the 1.6 per cent growth that the IMF had predicted for 2023 back in April.
At a news conference Wednesday after the Fed announced its latest quarter-point rate hike, Chair Jerome Powell revealed that the central bank’s staff economists no longer foresee a recession in the United States. In April, the minutes of the central bank’s March meeting had revealed that the Fed’s staff economists envisioned a “mild” recession later this year.
In his remarks, Powell noted that the economy has proved resilient despite the Fed’s rapid rate hikes. And he said he still thinks a soft landing is possible.
Thursday’s GDP report contained some encouraging news for the Fed’s inflation fighters: One measure of prices — the personal consumption expenditures index — rose at a 2.6 per cent annual rate last quarter, down from a 4.1 per cent pace in the January-March quarter, to the lowest level since the end of 2020.
Though that is still above the Fed’s 2.0 per cent inflation target, it amounts to “another welcome sign of disinflation,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.