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The U.S. economy experienced robust growth in the second quarter, driven by strong consumer and government spending, along with a notable increase in inventories, according to an initial estimate from the Commerce Department released on Thursday.
From April to June, real gross domestic product (GDP), which measures the value of all goods and services produced, grew at an annualized rate of 2.8% after adjustments for seasonality and inflation. This figure exceeded the 2.1% growth anticipated by economists surveyed by Dow Jones and marked an improvement from the 1.4% growth in the first quarter.
The first of three estimates highlighted the significant contributions from consumer spending, private inventory investment, and nonresidential fixed investment to the GDP growth. Personal consumption expenditures, a key indicator of consumer activity, increased by 2.3% in Q2, up from 1.5% in Q1, with both services and goods seeing solid gains.
Inventories added 0.82 percentage points to the overall growth, while government spending provided additional support, rising 3.9% at the federal level, including a 5.2% increase in defense spending.
However, imports surged by 6.9%, the highest quarterly increase since early 2022, which detracted from GDP, while exports grew by only 2%.
Following the report, stock market futures climbed, and Treasury yields fell.
Joseph Brusuelas, chief economist at RSM, commented, “The composition of growth is among the best we’ve seen in a while. This report supports the notion that the U.S. economy is experiencing a productivity boom, which will enhance living standards through lower inflation, high employment, and rising real wages.”
On the inflation front, the personal consumption expenditures (PCE) price index, a key metric for the Federal Reserve, increased by 2.6% in the quarter, down from 3.4% in Q1. Core PCE prices, which exclude food and energy and are closely watched by the Fed, rose by 2.9%, down from the previous quarter’s 3.7%.
The chain-weighted price index, which adjusts for changes in consumer behavior, rose by 2.3% in Q2, below the expected 2.6%.
Treasury Secretary Janet Yellen, speaking in Rio de Janeiro, affirmed that the GDP report “confirms our trajectory towards steady growth and declining inflation.”
Final sales to domestic private buyers, a strong indicator of underlying demand, grew by 2.6%, consistent with the previous quarter. However, the personal savings rate continued to decline, falling to 3.5% from 3.8% in Q1.
Despite strong retail sales data, which indicates consumer resilience against high interest rates and inflation, there are signs of stress in consumer finances. The Philadelphia Federal Reserve reported a record high in credit card defaults and rising revolving debt balances, even as banks tightened credit standards and issued fewer new cards.
The housing market also faces challenges, with falling sales and rising home prices putting pressure on first-time buyers.
Federal Reserve officials are expected to maintain current interest rates at their upcoming meeting, though market signals suggest a potential rate cut in September, the first in four years. Policymakers have shown caution but are increasingly open to easing monetary policy, with most indicating that further rate hikes are unlikely.
Additionally, the Labor Department reported 235,000 initial jobless claims for the week ending July 20, a decrease of 10,000 from the previous week and in line with forecasts. Continuing claims fell slightly to 1.85 million.
In other economic news, durable goods orders fell by 6.6% in June, contrary to expectations of a 0.3% increase. However, excluding transportation, new orders rose by 0.5%.
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