Economic growth exceeds expectations
Economic growth accelerated more than expected in the spring, weakening the case for rate cuts and The Federal Reserve is still not doing enough to cool the economy We intend to bring inflation down to our 2% target.
The Bureau of Economic Analysis said Thursday that real gross domestic product (GDP) Expanding at an annual rate of 2.8% That’s double the pace of 1.4% in the first quarter of this year and well above the consensus forecast of 2%.
Consumer spending, the driving force of the U.S. economy, 2.3 percent per year In the April-June period, it contributed about 1.6 percentage points to growth, matching the first quarter’s growth rate and defying expectations of a slowdown.
Durable goods consumption to grow again
The shift away from commodities, which had been a burden on manufacturing, has outlived its usefulness. Purchases of goods increased by 2.5%That was an acceleration from a 1.5% growth rate in the previous quarter. Consumption of nondurable goods increased 1.4% after declining 1.1%. After adjusting for inflation, households increased their spending on food, beverages, gasoline and energy and reduced their spending on clothing and footwear.
Spending on durable goods was even more impressive.It has been increasing at a rate of 4.7%. Cars and Trucks It had been a drag on GDP growth for four consecutive quarters, but this is the first time it has made a positive contribution. Furniture and appliances Spending was flat in the first quarter of this year and roughly flat in the fourth quarter of last year, but it was the biggest contribution to growth since the first quarter of 2021.
flat Recreational durables contribute to GDP growth The amount was reduced in the first quarter and then increased in the second quarter.
this is Not the behavior of the household sector, Or softening. American consumers typically took out loans to buy big-ticket items despite restrictive interest rates.
Services consumption increased by 2.2%.While this is a slower pace than the previous quarter, it is still a solid growth rate, compared with an average quarterly growth rate of 2.4% last year. Within the services sector, the discretionary category saw an acceleration. Travel, dining out, recreationThe biggest slowdown has been the slowdown in inflation-adjusted health care spending, a non-cyclical part of the economy that has grown strongly in recent years.
Dudley’s mistaken request for a rate cut
This is a recent Bloomberg Editorial Original Bill Dudley, President of the Federal Reserve Bank of New YorkHis comments immediately after the June meeting calling for the Fed to cut interest rates immediately were misplaced.
“For now, the Fed’s efforts to throttle the economy are having a visible effect: To be sure, the wealthy are still spending thanks to rising asset prices and refinancing their mortgages at historically low long-term interest rates,” Dudley wrote. “But the rest of us are generally spending what little we’ve managed to save through massive government transfers and feeling the effects of rising interest rates on credit cards and auto loans.”
The second quarter GDP report said the “remaining” American households Drained purchasing power Or they’re being held back by rising interest rates on credit cards and car loans.
In contrast, the best indicator of the strength of private sector demand maintained a solid pace of growth in the second quarter. Final sale to a domestic private buyer It grew 2.6% for the second consecutive quarter, bringing the growth rate for the first half of 2024 roughly in line with that for the first half of 2023.
There was a significant increase Business Expenses This should generate optimism for future productivity gains, the ultimate driver of growth.Nonresidential fixed investment, a key measure that includes spending on commercial construction, equipment and software, increased 5.2 percent. The main driver was an 11.6 percent increase in spending on equipment, even as investment in structures declined.
This would also be a sign of confidence in the economy. It reflects the growing popularity of Donald Trump Expectations are growing that voters and the Biden-Harris administration will see an end to or at least block plans to raise taxes on corporations and impose further regulatory burdens on growth.
There is another sign of rising business confidence. Inventory IncreaseAs expected, inventories rebounded in the second quarter after dragging down in the first quarter, contributing 0.8 percentage points to growth, while net exports dragged growth down by 0.7 percentage points. These variables effectively offset each other. Exports increased by 2.0 percent, while imports surged by 6.9 percent.— Supported by robust household consumption and corporate investment.
Dark clouds amid bright reports
Some of the news in the report was not so good. Housing investment is declining Following three consecutive quarters of growth, the company continued to grow in the second quarter. The Constraints of High Interest Rates Last year’s construction boom Homebuilders with high inventory Homebuilding is slowing more than they would like. The threat of lower interest rates could also be slowing homebuilding by putting existing homes on the market and reducing demand for new homes.
Nonresidential building investment fell 3.3%. The sector recorded double-digit growth last year thanks to fiscal policies that boosted economic growth. High-tech factory constructionThis growth led to an increase in construction jobs, allowing the Biden-Harris administration to claim that America is experiencing a manufacturing boom. The second quarter contraction suggests that some of this growth was actually borrowed from the future. As a result, future quarters may remain weak. Financial support has ended.
An unwelcome development was the 3.1% increase in government consumption, which was driven by a surge in federal government spending, especially Defense SectorConsumption increased by 5.2%. War Keynesianism It may be playing an overly large role in stimulating growth and draining real resources that could be utilized in other parts of the economy. The production of rockets for use in foreign wars does not increase the wealth of a nation. Just like domestic investment and consumption.
finally, Core Personal Consumption Expenditures Inflation The seasonally adjusted annualized rate came in at 2.9%, beating expectations, which could mean either last month’s weak inflation figure will be revised upward or June inflation, released tomorrow, will be higher than expected.
Facts change, but opinions on rate cuts remain the same
With economic growth rates much higher than expected and inflation rates rising, Wall Street’s credibility remains strong Expectations of a rate cut in September have grown, but a glimmer of hope for a cut in June has been dashed. The irrationality of insisting on the September cutsHigher growth would make a rate cut less urgent, while higher inflation would increase the risk of a rate cut leading to higher inflation, so expectations of a rate cut should recede.
The optimistic interpretation conveyed by Wall Street analysts on Thursday was that the report Soft Landing ScenarioThis would somehow lead to a series of Fed rate cuts that would keep asset prices rising without causing inflation at the consumer level.
That is still a possible outcome, but we believe this report makes it less likely. Instead, We see an economy that continues to resist the Fed’s attempts to slow it down. And there are signs that the stance of monetary policy is much more accommodative than the Fed expects, raising the risk that it will need to tighten monetary policy further to contain inflation, either through interest rate hikes or a renewed commitment to keep rates high for a longer period.
Wall Street has mispredicted the economy for four years in a row. The Fed thought inflation would be temporary in 2021, underestimated the Fed’s response in 2022, was convinced that Fed rate hikes would cause a recession in 2023, and started the year expecting five rate cuts. Why should we expect things to get better now?
The problem is that The Federal Reserve has been wrong almost as often.This raises the risk of policy mistakes in the form of premature interest rate cuts this year, leading to accelerating inflation.
