Economic growth unexpectedly increased to a 2.4% annual rate in the second quarter of this year, up from 2% the quarter before, the Bureau of Economic Analysis reported Thursday morning.
Economists had expected a 1.7% rate.
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Thursday’s report is the first of three estimates of GDP growth, adjusted for inflation, in the second quarter.
“This is a strong report, confirming that this economy continues to largely shrug off the Fed’s aggressive rate increases and tightening credit conditions,” said Olu Sonola, head of U.S. economics at Fitch Ratings. “The resilience of consumer spending continues to underpin broad-based economic growth, and business investment was stronger than expected.”
The report shows that consumer spending, as measured by personal consumption expenditures, grew at a 1.6% rate — a higher pace than expected. That shows economic activity is still humming despite the Federal Reserve’s attempts to tighten.
The second quarter was marked by the Fed’s efforts to bring inflation down. After more than a year of successive interest rate hikes, some by very aggressive margins, this week, the Fed opted to raise rates again, bringing its target range to 5.25% to 5.50%, the highest level in more than two decades. Rate increases have the effect of slowing economic output.
Declining GDP is the biggest indicator of an economic downturn or recession. Typically, two back-to-back quarters of negative GDP growth are indicative of a recession. So the fact that the GDP was positive in the first quarter and the second quarter is welcome news to economists, many of whom were predicting just months ago the country might be in a recession by now.
Inflation has been falling in response to the Fed’s tightening. The consumer price index tracked 3% annual inflation in June, a number that is quickly nearing the central bank’s 2% goal and is down from 9% last summer.
The labor market also typically takes a hit when the Fed raises rates, and it has managed to hold up extraordinarily well, given the circumstances.
The national economy added 209,000 jobs in June, according to the Bureau of Labor Statistics, and the unemployment rate is hovering around 3.7% — near the ultra-low level it was at before the pandemic.
GDP staying afloat, coupled with the resilient labor market, has buoyed hopes that the central bank will be able to pull off a “soft landing,” which is when inflation is brought down while a recession is avoided.
Fed Chairman Jerome Powell addressed the matter during a press conference with reporters on Wednesday. While he wasn’t ready to use the phrase “optimism,” he did note that Fed staff have shifted their forecast after predicting a mild recession just months ago.
“The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” Powell told reporters.
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Still, GDP growth is expected to slow in the coming year as the barrage of rate hikes continues to reverberate through the economy. The Congressional Budget Office released its economic projections on Wednesday and predicted slowing, although not negative, GDP growth.
Real GDP growth will slow to a 0.4% annual rate in the second half of this year and, for 2023 as a whole, will increase by 0.9%, the budget analysts project. The CBO forecasts that as the Fed begins easing monetary policy, GDP will increase by 1.5% in 2024, still a reading that is below trend.
