US economy grows faster than expected thanks to strong personal spending – Daily News

By August Saraiva | Bloomberg

US economic growth accelerated more than expected in the second quarter, showing that demand is holding up despite higher borrowing costs.

Gross domestic product rose 2.8% year-on-year in April-June after rising 1.4% in the previous quarter, the government’s initial estimate showed. The economy’s main growth engine, personal spending, rose 2.3%, also more than expected.

The closely watched core inflation measure rose 2.9%, down from the first quarter but still above estimates, according to a report from the Bureau of Economic Analysis released on Thursday.

Although the pace of growth has picked up since the first quarter, the numbers are still modest compared with a year ago. Consumer spending and broader economic activity have cooled under the weight of high interest rates, which is also helping to gradually tame inflation.

That bodes well for the Federal Reserve, which is trying to provide a soft landing for the economy and will likely start cutting interest rates as early as September. But it will be a good balance to cool the labor market enough not to throw millions out of work, especially as unemployment has been rising for three months now.

“This is a perfect report for the Fed, with growth in the first half of the year subdued, inflation continuing to ease and the elusive soft landing scenario seemingly within reach,” Olu Sonola, head of economic research at Fitch Ratings, said in a note.

Treasury yields rose and the S&P 500 fell. Policymakers are not expected to cut interest rates when they meet next week.

Consumer spending was driven mainly by a rebound in durable goods such as cars and furniture, as well as a more moderate increase in spending on services compared with the first quarter, the GDP report showed.

Government spending contributed more to GDP than in the first three months of the year, boosted by defense spending. Residential investment subtracted from growth for the first time in a year as high mortgage rates curbed sales activity and new construction.

Business investment rose at the fastest pace in almost a year, led by the biggest gains in equipment since the start of 2022. A separate report on Thursday showed that orders to U.S. factories for business equipment excluding aircraft and defense rose by the most since the beginning of last year in June — rebounding from a significant decline the previous month.

“While consumer spending, the main driver of growth, strengthened last quarter, it was much more muted compared to 2H23. We expect a cooling labor market and slowing income growth to compound the slowdown,” Bloomberg economist Eliza Winger said.

Inventories added to GDP for the first time since the third quarter of last year, boosted by the biggest increase in retail car values ​​in history after a cyberattack made it difficult for some dealers to process sales. That was mostly offset by net trade, with the deficit near its widest in two years.

Excluding inventories, government spending and trade, inflation-adjusted final sales to private domestic buyers — a key measure of underlying demand — rose 2.6% for the second straight quarter.

Going forward, forecasters expect the economy to slow more noticeably in the second half of the year as the job market loses momentum, further slowing income growth and weighing on consumer spending. Recent earnings reports from PepsiCo Inc., Nike Inc. and several airlines also indicate that Americans are starting to retreat and stretch themselves financially.

Separately, weekly initial claims for unemployment benefits fell by 10,000 to 235,000 in the latest period, while the number of continuing claims also fell. The claims data is prone to wide weekly swings at this time of year, which includes holidays, as well as school closures for summer vacations and the annual period of retooling cars to replace new models.