The U.S. economy grew by 2.4% in the second quarter, based on initial estimates, outpacing both first-quarter growth of 2% and consensus expectations of 1.5%. But economic activity wasn’t quite as robust as the headline number suggests, given decelerating growth in consumer spending.
That leaves the economy more dependent on the more volatile components of gross domestic product, namely business investment and government spending. “GDP growth in the second quarter was stronger than expected, but the result is hiding a strong slowdown in consumer demand, which accounts for two thirds of GDP,” says Eugenio Aleman, chief economist at Raymond James.
Personal consumption expenditures grew by 1.6% in the quarter, down from the first quarter’s 4.2%. In general, Americans spent more on services than goods in the period.
“Consumers are still willing to spend, but they have become increasingly cautious and selective amidst still-high prices and tighter credit conditions,” says Gregory Daco, chief economist at Ernst & Young’s global strategy consulting arm. “This has translated into much slower consumer-spending momentum after a strong start to the year.”
Thursday’s GDP number likely confirms the idea that the U.S. economy will have a soft landing, wherein inflation moderates without a significant economic downturn, Daco says. But it is unlikely to alter the Federal Reserve’s tough stance on taming inflation.
Fed Chair Jerome Powell reiterated at Wednesday’s Federal Open Market Committee briefing that central bank officials will be “data dependent” in making future monetary-policy decisions. The GDP report adds an important data point to the discussion, as will Friday’s release of the July jobs report and the quarterly employment cost index.
The other big news in the GDP report is that businesses are opening their pocketbooks again after a cautious start to the year — the inverse of consumer behavior. Nonresidential fixed investments, which include commercial real estate and equipment spending, rose by a healthy 7.7% during the second quarter. That was up from 0.6% during the first three months of 2023.
The surge in business spending reflects expressions of renewed optimism about the U.S. economic outlook during a recent round of second-quarter earnings calls.
Coca-Cola
(ticker: KO) CEO James Quincey noted in the beverage giant’s latest earnings call that inflation was moderating and
Kimberly-Clark
(KMB) CEO Michael Hsu said costs had stabilized.
Goldman Sachs CEO David Solomon also saw some room for optimism. “There’s no question recent economic data in the U.S. indicates the Fed’s efforts to fight inflation are showing progress, and we are starting to see more optimism about the forward trajectory,” he said during the bank’s earnings call.
Government spending rose solidly in the three months ended June, although by the smallest percentage since the second quarter of 2022. Overall spending rose 2.6%, with federal outlays up 0.9% and state and local outlays gaining 3.6%. That’s due, in part, to continued growth in infrastructure spending.
“We are seeing slower but still positive business investment and a favorable tailwind from the government sector, which shouldn’t be underestimated,” Daco says.
Daco doesn’t see consumer spending reaccelerating this year, given that Americans are battling tight credit conditions and have less excess savings than in prior postpandemic quarters. The resumption of student-loan repayments and rising debt balances are also headwinds. He predicts that consumer spending will advance by a modest 1.9% overall in 2023, and show muted growth of 0.8% in 2024.
Thursday’s GDP report is only a preliminary estimate, with the next estimate of second-quarter economic activity due on Aug. 30.
Write to Megan Leonhardt at [email protected]
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