US economic growth expected to moderate in Q2.
US economic growth expected to moderate in Q2.
U.S. Economy Shows Resilience and Beating Recession Fears
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The U.S. economy demonstrated its resilience in the second quarter, with a steady pace of growth fueled by consumer spending and increased business investment. These factors have potentially helped stave off the looming threat of a recession.
According to the Commerce Department’s report on second-quarter gross domestic product (GDP), the U.S. economy is expected to have grown at a moderate rate. Despite the Federal Reserve’s interest rate hikes since March 2022, the economy has largely weathered the storm. This indicates that the central bank’s effort to curtail inflation has been successful thus far.
Economists had been predicting a downturn since late 2022, but with inflationary pressures easing, some now believe that the soft-landing scenario envisioned by the Fed is plausible. The central bank’s recent decision to raise policy rates by 25 basis points to a range of 5.25% – 5.50% is seen as a reinforcement of this positive outlook.
Dean Maki, the chief economist at Point72 Asset Management, affirms that the economy is not on the brink of a recession. He states, “This will be another indication that the economy is not tipping into recession. Much of the effect of the rate hikes already has occurred. As long as the Fed is content that inflation is moderating at a fast enough pace, they’re not going to implement the kind of additional rate hikes that would be needed to bring about a recession.”
Experts’ predictions align with this sentiment, with a Reuters survey of economists estimating a growth rate of 1.8% for the second quarter, a slight decrease from the 2.0% in the previous quarter.
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Consumer Spending Remains Strong
Consumer spending continues to be a major driving force behind the U.S. economy, accounting for more than two-thirds of economic activity. Although the growth rate has slowed from the robust 4.2% seen in the previous quarter, spending on services has compensated for the decline in spending on long-lasting manufactured goods.
The support for spending is bolstered by several factors, including the excess savings accumulated during the pandemic, estimated to be as much as $2.1 trillion at one point. Additionally, strong wage gains resulting from a tight labor market and companies’ efforts to retain workers after labor shortages during the pandemic have contributed to consumer spending. These factors have been further reinforced by the low levels of layoffs experienced during this period.
The weekly jobless claims report from the Labor Department is expected to show a slight rise in first-time applications for state unemployment benefits. However, the number of people receiving benefits after an initial week of aid is predicted to decrease. The job market remains relatively stable, with unemployment rates near multi-decade lows.
Mike Skordeles, the head of U.S. economics at Truist Advisory Services, notes, “There are some pockets of job losses being announced here and there, but it does appear that people are getting jobs rather quickly if they are losing their jobs.”
Factory Construction Boosts Business Investment
Business investment, which almost stagnated in the first quarter, is anticipated to have regained momentum in the second quarter. A rebound in spending on equipment, such as aircraft and motor vehicles, is expected to contribute to this acceleration.
Furthermore, President Joe Biden’s administration’s efforts to bring semiconductor manufacturing back to the United States have had a positive impact on factory construction. Investments in nonresidential structures, particularly factories, have likely remained robust, further enhancing the resilience of the economy.
Government spending is also expected to bolster GDP growth, while trade is projected to have a negative impact after several quarters of contributing to growth.
Inventory investment remains uncertain, but most economists believe it will contribute at least half a percentage point to GDP growth. In the previous quarter, businesses significantly reduced inventory accumulation in anticipation of weaker domestic demand, which had a negative impact on GDP growth.
Although residential investment, including homebuilding, likely contracted for the ninth consecutive quarter, this decline is likely the smallest in the past 1-1/2 years. Historically, a decline in housing and auto production has signaled an economic downturn. However, an increase in new home sales and auto sales gives rise to cautious optimism that the U.S. economy may be able to avoid a recession, even if some analysts anticipate negative GDP growth in the first quarter.
Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting, remarks, “We’ll see some slowing in the second half of the year, and possibly negative GDP in the first quarter. But will it rise to the level of a recession? That’s less clear.”
Nonetheless, some economists remain convinced that a recession is on the horizon. They argue that higher borrowing costs will eventually hinder consumers’ ability to finance their spending with debt. Additionally, tighter credit conditions and the continued depletion of excess savings may curtail wage gains.
Richard de Chazal, a macro analyst at William Blair, emphasizes the differing circumstances in the current economic slowdown compared to previous recessions. He states, “What we’ve been used to in the last couple of downturns is that everything kind of turns down at the same time. What’s different this time is that we’re just seeing a slowdown that’s being driven by the Fed. Over time rates are going to increasingly bite, and the chances of a recession are higher than not having one.”
While uncertainties persist regarding the future path of the economy, the second-quarter results indicate that the U.S. economy remains resilient. With consumer spending and increased business investment, the country appears to be successfully navigating away from the potential threat of a recession.
