Howitzer shells in production at the Scranton Army Ammunition Plant in Scranton, Penn., on Aug. 27.Ted Shaffrey/The Associated Press
The American economy expanded at a healthy 3 per cent annual pace from April through June, boosted by strong consumer spending and business investment, the government said Thursday, leaving its previous estimate unchanged.
The Commerce Department reported that the nation’s gross domestic product – the nation’s total output of goods and services – picked up sharply in the second quarter from the tepid 1.6 per cent annual rate in the first three months of the year.
Consumer spending, the primary driver of the economy, grew last quarter at a 2.8 per cent pace, down slightly from the 2.9 per cent rate the government had previously estimated. Business investment was also solid: It increased at a vigorous 8.3 per cent annual pace last quarter, led by a 9.8 per cent rise in investment in equipment.
The third and final GDP estimate for the April-June quarter included figures showing that inflation continues to ease, to just above the Federal Reserve’s 2 per cent target. The central bank’s favoured inflation gauge – the personal consumption expenditures index, or PCE – rose at a 2.5 per cent annual rate last quarter, down from 3.4 per cent in the first quarter of the year. Excluding volatile food and energy prices, so-called core PCE inflation grew at a 2.8 per cent pace, down from 3.7 per cent from January through March.
The U.S. economy, the world’s biggest, displayed remarkable resilience in the face of the 11 interest rate hikes the Fed carried out in 2022 and 2023 to fight the worst bout of inflation in four decades. Since peaking at 9.1 per cent in mid-2022, annual inflation as measured by the consumer price index has tumbled to 2.5 per cent.
Despite the surge in borrowing rates, the economy kept growing and employers kept hiring. Still, the job market has shown signs of weakness in recent months. From June through August, America’s employers added an average of just 116,000 jobs a month, the lowest three-month average since mid-2020, when the COVID-19 pandemic had paralyzed the economy. The unemployment rate has ticked up from a half-century low 3.4 per cent last year to 4.2 per cent, still relatively low.
Last week, responding to the steady drop in inflation and growing evidence of a more sluggish job market, the Fed cut its benchmark interest rate by an unusually large half-point. The rate cut, the Fed’s first in more than four years, reflected its new focus on shoring up the job market now that inflation has largely been tamed.
“The economy is in pretty good shape,” Bill Adams, chief economist at Comerica Bank, wrote in a commentary.
“After a big rate cut in September and considerable further cuts expected by early 2025, interest-rate-sensitive sectors like housing, manufacturing, auto sales, and retailing of other big-ticket consumer goods should pick up over the next year. Lower rates will fuel a recovery of job growth and likely stabilize the unemployment rate around its current level in 2025.”
Several barometers of the economy still look healthy. Americans last month increased their spending at retailers, for example, suggesting that consumers are still able and willing to spend more despite the cumulative impact of three years of excess inflation and high borrowing rates. The nation’s industrial production rebounded. The pace of single-family-home construction rose sharply from the pace a year earlier.
And this month, consumer sentiment rose for a third straight month, according to preliminary figures from the University of Michigan. The brighter outlook was driven by “more favourable prices as perceived by consumers” for cars, appliances, furniture and other long-lasting goods.
A category within GDP that measures the economy’s underlying strength rose at a solid 2.7 per cent annual rate, though that was down from 2.9 per cent in the first quarter. This category includes consumer spending and private investment but excludes volatile items like exports, inventories and government spending.
Though the Fed now believes inflation is largely defeated, many Americans remain upset with still-high prices for groceries, gas, rent and other necessities. Former President Donald Trump blames the Biden-Harris administration for sparking an inflationary surge. Vice President Kamala Harris, in turn, has charged that Trump’s promise to slap tariffs on all imports would raise prices for consumers even further.
On Thursday, the Commerce Department also issued revisions to previous GDP estimates. From 2018 through 2023, growth was mostly higher – an average annual rate of 2.3 per cent, up from a previously reported 2.1 per cent – largely because of upward revisions to consumer spending. The revisions showed that GDP grew 2.9 per cent last year, up from the 2.5 per cent previously reported.
Thursday’s report was the government’s third and final estimate of GDP growth for the April-June quarter. It will release its initial estimate of July-September GDP growth on Oct. 30. A forecasting tool from the Federal Reserve Bank of Atlanta projects that the economy will have expanded at a 2.9 per cent annual pace from July through September.