The latest data from the Bureau of Economic Analysis indicates that the US economy has experienced stronger-than-expected growth in the second quarter, powered by a surprising uptick in consumer spending coupled with a reduction in inflationary pressures. According to a second estimate released on Thursday, the real gross domestic product (GDP) escalated at an annualized rate of 3% during the June quarter.
This figure is an upward revision from the previously anticipated growth rate of 2.8%, which was the consensus projection in a survey conducted by Bloomberg. In the first quarter, the real GDP exhibited a 1.4% increase according to government data, demonstrating a robust economic rebound. The revision in personal consumption expenditures (PCE) also reflects a significant improvement, climbing to a growth rate of 2.9%, up from a prior estimate of 2.3%.
This growth rate surpasses the Bloomberg-consensus expectation of a 2.2% increase. Thomas Feltmate, a Senior Economist at TD, noted that the rise in PCE stems primarily from a rebound in spending on goods, although it's crucial to highlight that this uptick may not sustain, particularly in light of the recent softening conditions in the labor market. Additionally, there was a noted acceleration in capital expenditures, primarily attributed to a spike in aircraft purchases, which is anticipated to not continue through the third quarter. Economists, including Feltmate, suggest that the resilience seen in the economy may soon begin to diminish.
The report also highlighted that headline PCE inflation has eased slightly to 2.5% from 2.6%, while core PCE, which excludes the more volatile sectors of food and energy, has slowed to 2.8% from 2.9%. Feltmate articulated a perspective of a 'goldilocks scenario,' where economic growth is likely to decelerate subtly during the second half of the year, allowing inflation rates to drift closer to the Federal Reserve's target of 2%.
This economic convergence may ultimately provide sufficient grounds for the Federal Open Market Committee (FOMC) to consider lowering its benchmark lending rate by at least 75 basis points by the end of the calendar year. Adding weight to this narrative, the Federal Reserve Chair Jerome Powell remarked on Friday that the 'time has come' for interest rate cuts, emphasizing that the economy remains on a solid growth trajectory. In the financial markets, analysts observe a 66% probability that the FOMC will initiate a rate cut of 25 basis points during the upcoming meeting on September 18, with the residual odds leaning towards a more pronounced reduction of 50 basis points, as indicated by the CME FedWatch tool..