Growth in the United States defies forecasts and accelerates in the 2nd quarter

July 27, 2023

Growth in the United States defied pessimistic forecasts, and accelerated in the second quarter, driven in particular by consumer spending and the rise in investment. It looks like it could escape recession this year, but economists are divided.

In the three months from May to June, gross domestic product (GDP) growth was 2.4% at an annualized rate – the annual increase at this rate -, compared to 2.0% in the first quarter, according to the Commerce Department’s first estimate, released Thursday.

Some analysts were expecting 2% growth, similar to the first quarter, according to MarketWatch consensus. Others even anticipated a slowdown, to 1.6%, according to Briefing.com.

Just comparing to the previous quarter, as other advanced economies do, growth is 0.6%.

President Joe Biden sees this stronger-than-expected growth as the fruit of his economic policy, “Bidenomics”: “the economy is growing and we are reducing costs for families,” he said in a statement.

GDP growth was driven in particular by consumption, its usual engine of growth, which however slowed compared to the first quarter. American households spent more on their rent or health care, but also on plane tickets.

Investments as well as state and local government spending also contributed, the Commerce Department said in its statement. On the other hand, real estate purchases fell, as did exports.

These developments take inflation into account, which means that growth is not due to rising prices.

Despite inflation on the one hand, and central bank rate hikes on the other, the world’s largest economy is surprisingly resilient.

GDP “was stronger than expected,” Rubeela Farooqi, economist for High Frequency Economics, said in a note.

And according to her, households “continue to benefit from positive employment growth and rising incomes (which) should keep growth on a positive trajectory this year”.

The recession, which seemed inevitable a few months ago, now even seems to be avoidable.

The economists of the American central bank (Fed) have just removed this risk from their economic forecasts, anticipating however “a significant slowdown in growth”, indicated Wednesday the president of the institution, Jerome Powell.

The International Monetary Fund (IMF) anticipates growth of 1.8% this year.

But other economists are more pessimistic.

“Consumer and business spending remains on track, but we think it’s only a matter of time before they feel the impact of high interest rates and tighter lending terms. “, according to Oren Klachkin, economist for Oxford Economics.

He anticipates “a slowdown” in the 3rd quarter, then “slight contractions” in the 4th and 1st quarters.

Growth is in fact suffering from high inflation, which reduces household purchasing power and restricts consumption.

This price increase, however, fell in June to its lowest level since March 2021, at 3.00% over one year, according to the CPI index.

To slow it down, the Fed has been raising its key rates since March 2022. As a result, banks are offering loans at higher rates to households and businesses, which are then less inclined to spend.

Its president, however, reported a “balance between the two risks. The risk of doing too much or not enough”, between inflation and recession, with “risks on both sides”.

Unemployment is still very low, at 3.6% in June.

In 2022, the growth of the US economy had slowed to 2.1%, after having experienced in 2021 the strongest growth since 1984 (5.9%), and in 2020 the largest decline in GDP since 1946 (-3 .5%) and two months of recession due to Covid-19.