Source: AFP
U.S. economic growth beat earlier expectations in the second quarter, boosted by consumer spending and inventory building despite high interest rates, government data showed on Thursday, after a slow start to the year.
The world’s largest economy grew 2.8 percent in the April-June period, up from 1.4 percent in the first three months of this year, the commerce ministry said.
The initial estimate was well above the 1.9% growth rate that economists had expected — a reassuring sign that consumption remains resilient.
The acceleration “primarily reflected a recovery in private inventory investment and an acceleration in consumer spending,” the Commerce Department said.
This was “partially offset by a decline in residential fixed investment,” he added.
While sectors such as manufacturing and housing struggled after the Federal Reserve raised interest rates rapidly in 2022 to combat rising inflation, consumption was stronger than analysts had expected.
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That has boosted the economy despite interest rates hovering at their highest levels in more than two decades – making borrowing more expensive for individuals and companies.
A key factor supporting consumption has been a robust labor market, which has seen wages continue to rise and businesses reluctant to lay off workers following recruitment difficulties during the pandemic.
With inflation slowing and wages continuing to rise, economists said real gains in consumers’ disposable income have become larger, allowing them to keep dipping into their wallets.
Despite the economy beating forecasts for a possible recession, President Joe Biden has struggled to assuage the concerns of many Americans who are feeling the strain of higher living costs.
With his shock exit from the 2024 election, it remains to be seen whether that negative sentiment will carry over to his potential Democratic replacement, Vice President Kamala Harris.
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Consumption “machine” –
“We see consumption continuing to be the engine of the economy, continuing to keep economic growth on a relatively strong growth path of around two percent,” Oxford Economics economist Matthew Martin told AFP.
He said that although unemployment has risen, the trend has more to do with market entries than layoffs.
This means it is not the start of a cycle where unemployment leads to a loss of income, which in turn reduces spending and causes more job losses.
However, there are still risks to the economy as unemployment tends to “shoot up” quickly, he said, noting that this is not an expected outcome at this time.
“This is a big case for us to start cutting rates in September and follow every other meeting from there,” he said of the Federal Reserve’s policy-making committee.
“Maintaining overly tight monetary policy when the labor market appears to have fully rebalanced could lead to an undesired weakening of employment growth and the economy,” EY chief economist Gregory Dako said in a recent note.
Source: AFP
