The economy picked up sharply in the second quarter as a rise in consumer and business spending offset a drop in housing construction and a widening trade gap.
The nation’s gross domestic product, the value of all goods and services produced in the U.S., expanded at a seasonally adjusted annual rate of 2.8% in the April-to-June period, the Commerce Department said Thursday. That’s up from a tepid gain of 1.4% early this year and 2.5% increase for all of 2023.
Forecasters surveyed by Bloomberg had projected a 1.9% increase.
Is the economy doing well right now?
The economy has been surprisingly resilient despite high interest rates and inflation the past two years as a result of strong job and wage gains that have provided consumers the wherewithal to keep spending.
But cracks are beginning to show as high borrowing costs take a bigger toll on households and companies.
Is US consumer spending increasing or decreasing?
In the second quarter, consumer spending increased a solid 2.3% annualized, above the 1.5% pace early this year but just below the more than 3% clip in the second half of 2023. Consumption makes up about 70% of economic activity.
To fuel their purchases, Americans are spending more of their paychecks, saving about 3.8% of their monthly income, well below the average 7% or so they socked away before the pandemic. As a result, they don’t have much cushion. Low and middle-income households have largely depleted their COVID-19-related reserves. Credit card debt is near a record high and delinquencies are historically elevated.
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More broadly, the economy is forecast to grow less than 2% annualized the second half of the year, according to a survey by Wolters Kluwer Blue Chip Economic Indicators.
"We should receive cooler GDP reports from here on out as consumers tighten their purse strings and businesses become more reticent to invest and hire," says Nationwide economist Oren Klachkin.
When can we expect the Fed to lower interest rates?
Many economists are urging the Federal Reserve to cut its key interest rate − now at a 23-year high of about 5.3% to fight inflation − soon. They argue the risk of acting too late and allowing the U.S. to tip into a recession is starting to outweigh the hazards of moving too soon and reigniting inflation, which has fallen to 3% from 9.1% in 2022. Most forecasters expect the Fed to start lowering its benchmark rate in September.
The sturdy 2.8% rise in output in the second quarter could make the central bank think twice about reducing rates in the near term. And it's likely to "mildly disappoint" investors who hoped the Fed would consider making a surprise rate cut at a meeting next week.