U.S. GDP Growth Accelerates, Defying Expectations of a Slowdown

July 27, 2023

The U.S. economy shrugged off recessionary fears in the second quarter as gross domestic product (GDP) growth accelerated to a faster-than-expected pace in the second quarter.

GDP, the sum total of all economic activity, grew by an annualized rate of 2.4% in the months between April and June, beating out estimates of 2% from Dow Jones economists and topping the 2% growth seen in the first quarter.

Consumer spending, which accounts for roughly 70% of all economic activity, cooled during the quarter, falling to an annualized rate of 1.6% in the second quarter from 4.2% in the first. The slowdown is largely due to slowing purchases of big-ticket items, likely driven by higher interest rates, as these items are most commonly purchased on credit. 

Slower consumer spending was offset by a big increase in business investing, which grew at an annualized rate of 7.7% during the second quarter, a sharp increase from Q1’s 0.6% increase.

Net trade slightly subtracted from the quarter’s growth, a potentially worrying sign that the large global economy is continuing to moderate.

As inflation continues to decline from its recent decades-high level and the labor market continues to show surprising resiliency, the quarter’s solid growth adds to the prospect of a soft landing, meaning inflation coming back down to the Fed’s 2% target without necessitating a recession. 

However, worries of a slowdown remain and it remains unclear if consumers and businesses will continue to spend at the same pace in the second half of the year. High-interest rates will persist, making consumer borrowing for cars and appliances, as well as business borrowing for machinery and construction projects, more expensive. Consumer spending has been boosted by the excess savings accumulated during the pandemic, which will continue to be spent down. Consumer spending may also take a hit when student loan payments resume later in the year.

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