U.S. economic growth is holding strong.
In the year’s second quarter, gross domestic product increased at an annualized rate of 2.4 percent, up from the first quarter’s upwardly revised 2 percent increase, according to the latest report from the Bureau of Economic Analysis.
This GDP report–which measures the value of goods and services produced in the U.S.–marks the fourth straight quarter of positive economic growth. “We expected that high interest rates would slow down GDP growth much more,” says Julia Pollak, chief economist at ZipRecruiter. “And instead, that hasn’t really been the case.”
Consumer spending, which accounts for approximately 70 percent of economic growth in the U.S., drove much of the increase but decelerated in the second quarter–from an initial 4.2 percent surge last quarter to a 1.6 percent increase. “The consumer is under a little bit of pressure,” says Pollak. “Credit card interest rates are rising, and we’re seeing a slight uptick in credit card delinquencies.”
Other drivers included nonresidential fixed investment, state and local government spending, private inventory investment, and federal government spending. Exports and residential fixed investment decreased.
Indeed, consumer spending moderated, but the business impact will vary by industry, says Andrew Patterson, senior economist at Vanguard: “Be aware of what’s going on in your sector.” For instance, goods and services led the way for consumer spending in sectors like housing and utilities, healthcare, recreational goods and vehicles–so companies in those sectors could continue to expect strong demand.
Meanwhile, business investment numbers rebounded after weakening in the first quarter–a sign of optimisim from businesses. The Chips Act and the Inflation Reduction Act–both major pieces of legislation designed to incentivize investment in U.S. manufacturing, sustainability projects, and more–are likely driving this bump, says Yelena Maleyev, an economist at KPMG.
Overall, this GDP report signals economic optimism, despite some recent weaker numbers. June brought the weakest jobs report of 2023 so far. Job openings came down in May. But that didn’t stop the Federal Reserve from hiking interest rates by a quarter of a percentage point again on Wednesday, reaching the highest level in 22 years and evidence of still-too-strong numbers.
Indeed, unemployment remains low, and though headline inflation cooled to 3 percent in June, economists are more concerned with core inflation, the inflation number that cuts out volatile food and gas prices, Patterson says. This remains stubbornly high at 4.8 percent.
That said, Pollak says that the strong GDP report is a good sign for businesses: “The worst-case scenario would have been an economic slowdown with persistently high inflation. Instead, we’ve had a strong economy where activity has remained robust, and inflation, nevertheless, has come down quite meaningfully.”
But that could change. The current economic environment is somewhat of a “tightrope,” says Lightcast senior labor economist Ron Hetrick: “I don’t want demand to go away, because I need to sell. But I really need it to be calm enough where there’s not a huge war for talent.”
One thing is clear: inflationary pressures continue to weigh on business owners. The upcomingEmployment Cost Index later this week will paint a clearer picture of wage pressure–which, along with inflation, will help inform the Fed’s next steps, Patterson says:
“Recession or no recession, you’re going to need to see those come down before the Fed can be able to declare victory.”
