New Century Advisors chief economist Claudia Sahm and Piper Sandler chief investment strategist Michael Kantrowitz discuss whether the economy is on the cusp of recession on ‘Making Money.’
The U.S. economy grew at a faster pace than expected at the beginning of 2024 as consumers continued to open their wallets despite ongoing inflation and high interest rates.
Gross domestic product, the broadest measure of goods and services produced across the economy, grew by 2.8% on an annualized basis in the three-month period from April through June, the Commerce Department said in its first reading of the data on Thursday.
That is much higher than the 2% increase forecast by LSEG economists and the 1.4% pace seen during the first quarter.
“The U.S. economy is much stronger than people realize and to the extent that markets were worried about a growth slowdown, they should breathe a sigh of relief after this morning’s GDP number,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
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Consumer spending, which accounts for about two-thirds of GDP, saw a solid increase during the second quarter. It rose 2.3% for the period, up from the 1.5% figure recorded the previous quarter, as Americans boosted their spending on goods.
Business investment also rose at a brisk 5.2% pace in the spring, even as companies dealt with headwinds like high interest rates.
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“GDP doubled from the first quarter as consumers spent more than expected and businesses built up inventories expecting continued good consumer demand,” said Robert Frick, corporate economist at Navy Federal Credit Union. “This was a nice surprise in further support of the expansion continuing, but not so nice as to make the Fed hesitate in cutting interest rates.”
A worker grinds a weld on a safe that is being manufactured at Liberty Safe Company in Payson, Utah, on March 22, 2022. (George Frey/Getty Images / Getty Images)
Despite the increase last quarter, the economy still appears to be moderating in the face of higher borrowing costs – the steepest in more than two decades. Before the Federal Reserve aggressively hiked interest rates in 2022 and 2023 to cool inflation, economic growth was much higher than it is now.
There are other signs that growth is slowing in the face of tighter monetary policy. Job growth is moderating. The housing market, which is vulnerable to higher interest rates, is trapped in a prolonged downturn, and consumer spending has shown signs of leveling off.
Many consumers remain unhappy with the state of the economy as they continue to feel the sting of higher prices for everyday necessities like rent, groceries and car insurance. While inflation has fallen from a peak of 9.1%, it remains higher than the Fed’s 2% target.
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“The real economy is not as strong as the second quarter topline GDP number suggests,” said Alfredo Ortiz, CEO of the right-leaning Job Creators Network. “In the real world, Americans are still struggling to make ends meet, having to choose between buying gas and groceries.”
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Fed officials have indicated that they are prepared to start cutting interest rates soon amid signs that the economy and inflation are cooling. Investors widely expect policymakers to make the first reduction during their September meeting.
