US Economic Growth Revised Up to Strong 3% Annual Rate Last Quarter

The U.S. economy demonstrated strong growth last quarter, expanding at a healthy annual rate of 3%, according to a government report released on Thursday. This upbeat assessment from the Commerce Department marked an increase from its previous estimate of 2.8% for gross domestic product (GDP) growth, which measures the total output of goods and services produced.

This growth rate follows a sluggish start to the year, when the economy grew by just 1.4% in the first quarter of 2024. The second quarter’s performance indicates a notable acceleration, largely driven by robust consumer spending and increased business investments.

Consumer spending, which represents approximately 70% of U.S. economic activity, climbed at a 2.9% annual rate last quarter. This represents an increase from an earlier estimate of 2.3%, reflecting increased consumer confidence and spending behaviors. Additionally, business investments surged at a rate of 7.5%, with a notable 10.8% increase in investments directed towards equipment, highlighting businesses’ willingness to expand and upgrade their operations.

The latest report showcases an economy that has remained resilient in the face of persistent high interest rates. These economic indicators are crucial as voters prepare for the upcoming November presidential election. Despite some relief in inflation figures, many Americans continue to feel the pinch of high prices, even as inflation has decreased significantly since its peak in mid-2022.

Encouragingly, consumer confidence has shown signs of recovery, as noted in recent surveys conducted by the Conference Board and the University of Michigan. Bill Adams, chief economist at Comerica Bank, highlighted that the second-quarter GDP revisions indicate a strong economy. He noted, “Solid growth of consumer spending propelled the economy forward in the second quarter, and the increase of consumer confidence in July suggests it will lead to continued growth in the latter half of the year.”

The revised GDP estimate for the April-June quarter also revealed that inflation is easing, although it remains slightly above the Federal Reserve’s target of 2%. The preferred inflation measure of the central bank, known as the personal consumption expenditures index (PCE), rose at an annual rate of 2.5% last quarter, down from 3.4% in the first quarter. Additionally, core PCE inflation, which excludes volatile food and energy prices, increased by 2.7%, a decrease from 3.2% in the prior quarter.

The data suggests that the economy’s underlying strength remains robust, with metrics indicating a 2.9% annual growth rate, up from 2.6% in the first quarter. This figure focuses on consumer spending and private investment while excluding volatile elements such as exports and inventories.

To combat soaring prices in recent years, the Federal Reserve raised benchmark interest rates 11 times from 2022 through 2023, ultimately pushing rates to a 23-year high. This tightening of monetary policy has played a role in reducing annual inflation from a high of 9.1% to 2.9% as of last month, with the expectation that higher borrowing costs could lead to an economic slowdown.

However, the persistent growth in the economy and continued job hiring have defied these expectations. With inflation now just a touch above the Fed’s target, chair Jerome Powell has expressed that the central bank is close to achieving its inflation control objectives. Consequently, the Fed is anticipated to begin cutting interest rates starting with its next meeting in mid-September.

A reduction in interest rates is likely aimed at facilitating a “soft landing,” which would involve balancing efforts to lower inflation with maintaining a healthy job market, thereby preventing a recession. This could result in lower rates for consumer loans, including mortgages and auto loans.

Recently, the Fed has shifted its focus more towards supporting the job market, which has been gradually weakening, rather than solely concentrating on inflation. Although the unemployment rate has increased for four consecutive months, reaching 4.3%, it remains low by historical comparisons. Job openings and hiring rates have also witnessed a decline but still reflect solid levels.

The Commerce Department’s recent report serves as the second estimate of GDP growth for the April-June quarter, with a final estimate set to be released next month.