The U.S. economy exceeded expectations in the second quarter, with a growth rate of 2.4%. This outperformed both the previous quarter’s growth of 2% and the consensus forecast of 1.5%. However, a closer look reveals that the overall economic activity was not as robust as the headline figure suggests, primarily due to slowing growth in consumer spending.
With less reliance on consumer spending, the economy becomes more dependent on the volatile components of gross domestic product (GDP) – namely, business investment and government spending. According to Eugenio Aleman, chief economist at Raymond James, while the GDP growth in Q2 was stronger than anticipated, it masks a significant slowdown in consumer demand, which accounts for two-thirds of GDP.
During the quarter, personal consumption expenditures only grew by 1.6%, a decline from the first quarter’s 4.2% growth. Americans, in general, allocated more of their spending towards services rather than goods.
Gregory Daco, chief economist at Ernst & Young’s global strategy consulting arm, explains that consumers are still willing to spend; however, they have become more cautious and selective due to elevated prices and tighter credit conditions. As a result, consumer spending has experienced a notable decrease in momentum after a strong start to the year.
Thursday’s GDP announcement seemingly confirms predictions of a soft landing for the U.S. economy. This refers to a scenario where inflation moderates without a significant economic downturn, according to Daco. Nonetheless, it is unlikely to sway the Federal Reserve from its firm stance on controlling inflation.
During Wednesday’s Federal Open Market Committee briefing, Fed Chair Jerome Powell emphasized that future monetary-policy decisions will be dependent on data. The GDP report holds significance in this ongoing discussion, as will the release of the July jobs report and the quarterly employment cost index, scheduled for Friday.
The Latest GDP Report: Businesses Opening Their Pocketbooks
The latest GDP report reveals an exciting trend: businesses are opening their pocketbooks once again, signaling a shift from consumer behavior. Nonresidential fixed investments, which encompass commercial real estate and equipment spending, experienced a robust increase of 7.7% in the second quarter. This is a significant jump from the modest 0.6% growth seen in the first three months of 2023.
This surge in business spending has been fueled by a renewed sense of optimism surrounding the U.S. economic outlook. During recent second-quarter earnings calls, industry leaders expressed their confidence. James Quincey, CEO of Coca-Cola, highlighted the moderating inflation, while Michael Hsu, CEO of Kimberly-Clark, emphasized the stabilization of costs.
Even Goldman Sachs CEO David Solomon acknowledged the positive developments. He noted that recent economic data in the U.S. indicates progress in the Federal Reserve’s efforts to combat inflation, fostering greater optimism about future prospects.
Meanwhile, government spending saw solid growth in the three months leading up to June, although the rate of increase was the smallest since the second quarter of 2022. Overall spending rose by 2.6%, with federal outlays increasing by 0.9% and state and local outlays gaining 3.6%. This growth can be attributed in part to continued investment in infrastructure.
According to economist Daco, while business investment and government support remain positive, consumer spending is unlikely to regain momentum this year. Americans are grappling with tight credit conditions and have fewer excess savings compared to previous post-pandemic quarters. Additionally, the resumption of student loan repayments and rising debt balances present further challenges. Daco predicts that consumer spending will experience modest overall growth of 1.9% in 2023, followed by muted growth of 0.8% in 2024.
It is important to note that this GDP report is currently a preliminary estimate, with the next estimation of second-quarter economic activity set for release on Aug. 30.
