US Economic Growth Picks Up in Second Quarter Amid Falling Inflation

Post by: Kanchan Chandel

U.S. Economic Growth Likely to Surge in Q2; Inflation Eases

The U.S. economy is expected to show notable growth for the second quarter, fueled by strong consumer spending and increased inventory accumulation. Despite significant rate hikes by the Federal Reserve in 2022 and 2023, the economy continues to outperform its global counterparts, supported by a resilient labor market, even though unemployment has reached a 2.5-year high of 4.1%.

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The Commerce Department’s preliminary report on second-quarter GDP, due Thursday, is anticipated to reveal a deceleration in inflation, with all key measures projected to show sub-3% increases. This easing inflation comes as a positive development for U.S. central bank officials ahead of their upcoming policy meeting.

Economists project that GDP grew at an annualized rate of 2.0% last quarter, just above the Fed’s target non-inflationary growth rate of 1.8%. Estimates vary widely, from as low as 1.1% to as high as 3.4%. However, the Atlanta Fed has recently revised its GDP estimate down to 2.6% from 2.7%, following new data indicating a narrowing trade deficit and increased retail and wholesale inventories.

Despite this projected growth, the pace remains slower compared to the 4.2% rate achieved in the latter half of the previous year. Consumer spending, which constitutes over two-thirds of the economy, is estimated to have increased at around a 2.0% rate, up from 1.5% in the first quarter. Much of this spending occurred in June.

Businesses have been building inventories, which could contribute at least a full percentage point to GDP growth after previously being a drag. Despite this, domestic demand growth is expected to be around 2.4%. The anticipated rise in GDP growth is likely to support productivity improvements, which could help mitigate labor cost increases and price pressures. The core Personal Consumption Expenditures (PCE) price index is forecasted to rise at a 2.7% rate, down from 3.7% in the first quarter, while the broadest measure of prices, the gross domestic purchases price index, is expected to increase by 2.6%, compared to 3.1% in the previous quarter.

Dan North, a senior economist at Allianz Trade North America, suggests that inflation may become a more significant issue than growth figures. The Fed has maintained its benchmark interest rate at 5.25%-5.50% for the past year, having raised it by 525 basis points since 2022. A moderation in inflation and a cooling labor market could lead to financial markets anticipating up to three rate cuts this year, starting in September.

Business investment in equipment is expected to have picked up after a sluggish first quarter, and government spending is likely to have supported growth. However, trade is projected to have negatively impacted growth, with a significant trade deficit reducing GDP by an estimated 1.4 percentage points, the largest drag in over two years. This negative effect on GDP is anticipated to be offset by the rise in inventories. The housing market, impacted by a surge in mortgage rates, likely experienced a contraction in residential investment after strong growth in the first quarter.

Looking ahead, while economic growth is set to pick up, uncertainties persist for the second half of the year. The labor market slowdown may affect wage gains, and with the saving rate below pre-pandemic levels, the full impact of the Fed’s rate hikes might still be to come. State and local government revenue slowdowns could also dampen spending, and potential new tariffs might influence business import decisions if former President Donald Trump wins the upcoming presidential election.

Despite these challenges, a recession is not anticipated, with expectations for monetary policy easing later this year. Ian Shepherdson of Pantheon Macroeconomics predicts that GDP growth will likely slow to a range of 1.0% to 1.5% in the second half of the year, as the effects of corporate borrowing costs continue to play out.

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