In a testament to the resilience of the American economy, the US government has reported a 2.1% annual growth rate for the second quarter of 2023, reflecting steady expansion despite higher borrowing costs for consumers and businesses. This figure, a slight downgrade from the initially estimated 2.4% growth rate, underscores the economy’s durability amidst the Federal Reserve’s relentless efforts to curb inflation through interest rate hikes.
The Commerce Department’s second estimate of growth for the last quarter indicates a slight acceleration from the 2% annual growth rate recorded from January through March. Even as the Federal Reserve’s inflation-taming measures have injected a degree of slowness into the economy, it has managed to maintain its expansionary trajectory, with hiring continuing and consumer spending remaining robust. This steady growth has been fuelled by increases in consumer spending, business investment, and state and local government outlays, highlighting the multifaceted nature of the US economic engine.
US Economy Demonstrates Resilience Amidst Fed’s Anti-Inflation Efforts
Slight Acceleration in Q2 Growth
The US economy expanded at an annual rate of 2.1 percent from April to June, according to the government’s revised estimate. This pace demonstrates ongoing economic resilience despite higher borrowing costs for consumers and businesses. Previously, the government had estimated a 2.4 percent annual growth rate for the last quarter. This marks a slight acceleration from the 2 percent annual growth rate recorded from January through March.
Factors Driving Growth and Inflation Cooling
The report on the nation’s gross domestic product (GDP) indicates that the growth in the second quarter was driven by increases in consumer spending, business investment, and state and local government outlays. A measure of consumer prices within the report also revealed a cooling of inflation, which could potentially alleviate the need for the Federal Reserve to further raise interest rates. Eugenio Alemán, chief economist at Raymond James, stated that “lower growth and weaker increases in prices are good news for the Federal Reserve”.
Consumer Spending and Business Investment
Consumer spending, which constitutes about 70 percent of the US economy, rose at a 1.7 percent annual pace in the second quarter, down from 4.2 percent in Q1 of 2023. Business investment, excluding housing, saw a strong 6.1 percent annual rate increase. However, investment in housing experienced a decline in Q2, primarily due to higher mortgage rates.
Inflation and Job Market Trends
Despite the Fed’s aggressive campaign to counteract a resurgence of inflation, which last year reached a four-decade high, the American economy has remained surprisingly durable. Since March of the previous year, the Fed has raised its benchmark rate 11 times, making borrowing more expensive and leading to widespread predictions of an impending recession. However, since peaking at 9.1 percent in June 2022, year-over-year inflation has been decreasing steadily, coming in at 3.2 percent last month.
The job market has also remained robust, with an average of 258,000 jobs added per month this year. This average has slowed over the past three months to 218,000. Despite a report indicating that job openings and job changes are decreasing, job openings still remain above pre-pandemic levels, and the unemployment rate is just above a half-decade low at 3.5 percent.
The US economy continues to demonstrate resilience despite the Fed’s rigorous measures to control inflation. The slight acceleration in growth, along with a cooling of inflation and a steady job market, presents a scenario where the Fed could potentially address high inflation without triggering a severe recession. However, the overall economic picture remains complex, and effects of these dynamics will continue to unfold in the months ahead.