The US economy grew more slowly in the second quarter than previously expected

Washington, DC
CNN
—

The US economy grew more slowly in the second quarter than previously expected – a good sign for the Federal Reserve, which is trying to cool demand to cut price increases.

Gross domestic product, the broadest measure of economic output, rose at an annual rate of 2.1% in the second quarter, according to the Commerce Department’s second estimate, released Wednesday morning. This is a slightly slower pace than the 2.4% initially estimated by management.

The second estimate took into account the increase in consumer spending, government expenditures and exports, compared to the initial estimate. Meanwhile, business investment and inventories were revised downward. Commercial investment – referred to as non-residential fixed investment – was revised to a growth rate of 6.1%, compared to 7.7% in the first estimate. Fixed residential investment, which reflects conditions in the US housing market, had a smaller impact on growth than previously expected.

Economic growth in the second quarter was mostly broad-based, but there were some signs of weakening demand for commodity purchases and imports. Consumer spending, which accounts for about 70% of economic output, was revised up slightly in the second estimate.

“The economy is slowing to a pace that will help bring demand in line with US production capacity and tame inflation,” Bill Adams, chief economist at Bank of Comerica, wrote in an analysis note on Wednesday. “Revisions to GDP are good news on two levels: growth still looks good, and downward revisions reduce the risk of the economy overheating and worsening inflation.”

Economists widely expected the summer to be strong, as Americans spend big on travel, dining and other personal experiences. Retail spending jumped in July, after the movie “Barbie” became a smash hit and Taylor Swift sold out tickets to major stadiums across the US. The Commerce Department will release July figures on consumer spending, which affects retail sales, on Thursday.

The US economy was robust during the summer months, but this perceived strength made some Fed officials jittery when they met in July to discuss monetary policy. The central bank chose to raise interest rates by a quarter of a percentage point, to their highest level in 22 years.

Federal Reserve Chairman Jerome Powell said last week that there could be more interest rate hikes if the economy does not slow.

“Additional evidence of sustained above-trend growth may jeopardize further progress on inflation and could warrant further monetary tightening,” Powell said at the Fed’s annual economic symposium in Kansas City.

The Federal Reserve Bank of Atlanta currently estimates that GDP growth will accelerate sharply to an annualized rate of 5.9% in the third quarter, though that estimate is likely to be revised downward as the third quarter draws to a close.

There are some factors that could facilitate the slowdown in growth, such as the resumption of student loan payments in October and the delayed effects of rate hikes.

The average monthly payment for the 44 million Americans with student loans is between $210 and $314, according to Wells Fargo, though the Biden administration recently launched an income-based payment plan.

There is a great deal of uncertainty about the delayed effects of monetary policy tightening, namely when these effects might be transmitted to the broader economy and to what extent they will affect activity. The Fed launched its most aggressive rate hike campaign in decades about a year and a half ago, yet the US consumer is still fueling growth.

The economy is likely to continue to be resilient in the coming months, increasing the odds of a Fed soft landing, a scenario in which inflation returns to the central bank’s 2% target without a sharp rise in unemployment.

“Looking ahead, the high-frequency data points to steady economic momentum in the second half of the year and confirms that a recession is not on the horizon,” Lydia Bousseur, chief economist at EY-Parthenon, wrote in an analyst. NB.

“It is worth noting that real GDP is on track to grow at around 2.5% annually in the third quarter. Overall, the outlook for the US economy has improved, as unique post-pandemic economic dynamics seem to make the soft landing scenario more plausible,” she wrote.