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US Economy Beats Expectations in Q2 with Consumer Spending and Business Investment
The US economy outperformed expectations in the second quarter, supported by resilient labor market conditions, which bolstered consumer spending and saw increased business investment in equipment, potentially staving off a much-feared recession.
The Department of Commerce's advance second-quarter gross domestic product (GDP) report indicated sustained strength in domestic demand, although inflation subsided significantly during the same period.
This has led some economists to believe that the Federal Reserve may not need to raise interest rates beyond this year but instead maintain higher borrowing costs for a while.
The recent 25 basis point policy hike by the United States central bank brought the rate to a range of 5.25 percent to 5.5 percent.
Christopher Rupkey, chief economist at FWDBONDS in New York, expressed optimism, stating, "The economy is more than resilient, solid second-quarter growth shows it has triumphed over the naysayers saying recession was inevitable following the inflation shock and the Fed's aggressive rates stance to stem it."
According to the report, GDP grew at an annualized rate of 2.4 percent in the last quarter, compared to the 2 percent pace in the preceding January-March quarter.
Economists polled by Reuters had projected a GDP growth rate of 1.8 percent for the April-June period.
Inflation measurements in the economy, such as the price index for gross domestic purchases, increased at a slower 1.9 percent rate in the second quarter, down from the 3.8 percent pace in the first quarter.
When excluding food and energy, prices rose at a 2.6 percent pace, following a 4.2 percent increase in the previous quarter.
Despite the housing market and manufacturing sectors experiencing challenges, the US economy has largely weathered the 525 basis points in rate hikes by the Fed since March 2022, as the central bank takes on inflation.
Previously, economists had predicted a downturn since late 2022, but with price pressures easing, some now believe that the soft-landing scenario envisioned by the Fed for the economy is plausible.
Consumer spending, accounting for over two-thirds of the US economic activity, increased at a 1.6 percent pace.
Although the growth rate was slower than the robust 4.2 percent rate in the first quarter, it still contributed more than a full percentage point to GDP growth.
While spending on durable goods has slowed after the pandemic-induced boom, service expenditures have picked up the slack.
Consumer spending is being supported by excess savings accumulated during the pandemic, estimated by economists to have reached as high as $2.1 trillion at one point, as well as debt and strong wage gains from a tight labor market.
Companies are retaining workers after facing labor shortages during the pandemic, which is evident in the consistently low levels of layoffs.
The labor market also saw positive developments, with initial claims for state unemployment benefits dropping to the lowest level since February. Economists had projected higher claims, but the actual data came in lower at 221,000 for the week ended July 22.
Employment in the leisure and hospitality sector, however, remained below pre-pandemic levels.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, dropped significantly, indicating that some laid-off workers are quickly finding new employment.
The continuing claims data covered the week when households were surveyed for July's unemployment rate.
Investment in businesses accelerated in the second quarter after a sluggish first quarter, primarily due to increased spending on equipment, including aircraft and motor vehicles.
Efforts by President Joe Biden's administration to bring semiconductor manufacturing back to the US have contributed to factory construction.
Additionally, investment in nonresidential structures, such as factories, remained robust, further supporting the economy's resilience.
Government spending also played a role in GDP growth, alongside a boost from inventory investment.
However, trade posed a drag after contributing to growth for four consecutive quarters. Residential investment, including homebuilding, contracted for the ninth straight quarter.
Despite these positive indicators, some economists remain concerned about a looming recession.
They argue that higher borrowing costs could eventually hinder consumer spending fueled by debt, especially considering that banks are tightening credit.
Additionally, the gradual depletion of excess savings accumulated during the pandemic and slowing job growth might dampen wage gains.
In conclusion, the US economy showcased stronger-than-expected growth in the second quarter, backed by robust consumer spending and increased business investment.
However,
the sustainability of this growth amid inflation and future borrowing costs
remains a subject of debate among economists.
(Courtesy: Al-Jazeera)
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