US economy expands more than expected in second quarter, boosted by spending

U.S. economic growth accelerated more than expected in the second quarter of the year, showing that demand is resisting the pull of higher borrowing costs. Gross domestic product (GDP) increased at an annualized rate of 2.8%, after rising 1.4% in the previous period, according to the government’s initial estimate. The main driver of growth in the economy, consumer spending, grew 2.3%, also performing above expectations. The GDP figure provides a new indication of the economy’s resilience to continued interest rate increases, and may influence the Federal Reserve’s decision to undertake a rate cut in September, given that no movement in that direction is expected at its meeting next week. This first GDP figure, however, will still be subject to two revisions.

According to a report released Thursday by the Commerce Department’s Bureau of Economic Analysis (BEA), consumer spending was boosted primarily by a surge in purchases of goods such as automobiles and furniture. Growth was more moderate in terms of spending on services, compared to the first quarter.

Compared to the start of the year, between April and June public spending contributed more to GDP, driven by defense spending. Real estate investment, on the other hand, detracted from growth for the first time in a year. The reason is that high mortgage rates slowed home sales and new housing starts.

Business investment, meanwhile, grew at the fastest pace in nearly a year, led by the biggest gain in capital goods since early 2022. A separate report showed that orders placed with U.S. factories for business equipment, excluding aircraft and defense, rose in June by the most since early last year. It’s a sign that such spending will continue to contribute to growth in the months ahead.

“See you in September,” said Renaissance Macro Research analyst Neil Dutta, as reported by Bloomberg. “Today’s data will reinforce the idea that the Federal Reserve has the advantage of time. In the Fed’s view, there is no need to rush, as private domestic demand has grown at a solid pace during the second quarter.” The official price of money has been in the range of 5.25%-5.5% since July of last year, its highest in 23 years, and everything points, according to experts, to it not moving next week.

The BEA also published a reading of core inflation on Thursday (which excludes energy and food prices because they are more volatile). This indicator stood at 2.9%, less than in the first quarter, but still above forecasts. One of the objectives of central banks is to set inflation at around 2%, the threshold considered healthy to promote economic growth without punishing consumers, and core inflation is taken as a reference for the trend that general inflation will follow in the short or medium term.

Although the pace of economic growth has picked up from the first quarter, the figures still represent a moderation from last year. Consumer spending and economic activity in general have cooled under the weight of high interest rates. But that, at the same time, is helping to gradually control inflation, which last month was 3%.

Initially, the data bodes well for the Federal Reserve, which is trying to ease inflation without causing an economic recession. However, there is another key factor: the rise in unemployment. This data point has been rising for three consecutive months and is a determining variable for the Fed. Not so much because it can influence the decision to cut rates, which will come sooner or later, but rather when to do so.

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