US economic growth accelerates to 2.4% in second quarter

Economic growth in the US was stronger than expected in the second quarter of 2023, as activity proved resilient in the face of the Federal Reserve’s campaign of aggressive interest rate rises.

The world’s largest economy grew 2.4 per cent on an annualised basis between April and June, according to preliminary figures released by the Department of Commerce on Thursday.

That marked an acceleration from a 2 per cent growth rate in the first quarter, and was well above the 1.8 per cent rate predicted by economists.

Consumer spending growth slowed after an unusually strong start to the year but the reduction was more than offset by strong business investment in inventories and fixed assets.

“We’re seeing some encouraging signs of resilience, especially when you look at private sector demand,” EY Parthenon chief economist Gregory Daco said. “Whether its consumers or businesses, there’s still a desire to drive growth and spend, albeit with more caution than in the past.”

The data comes a day after the US central bank raised its benchmark interest rate to the highest level in 22 years as part of its efforts to tame inflation.

The consumer price index has fallen from a peak of more than 9 per cent in June 2022 to 3 per cent last month, while the unemployment rate remains close to record lows and consumer confidence has improved.

The combination of recent data has raised hopes among economists and investors that the central bank will achieve the rare feat of a “soft landing” — bringing inflation under control without significant economic damage. But others are concerned that the economy’s resilience will make it harder to bring inflation all the way to the Fed’s 2 per cent target.

Fed chair Jay Powell on Wednesday said his “base case is that we will be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses”.

He also noted the risks: “At the margins, stronger growth could lead over time to higher inflation and that would require an appropriate response for monetary policy, so we’ll be watching that carefully.”

Eric Winograd, senior economist at AllianceBernstein, said: “To me the most important signal out of [Thursday’s data] is that households continue to consume . . . And I don’t think we should expect the consumer to weaken until the labour market does.”

Outlook upgrades and upbeat commentary from several US companies this week have also painted a picture of a resilient domestic consumer.

McDonald’s chief executive Chris Kempczinski told analysts on Thursday the fast-food chain had not observed a “dramatic” overall change in the US consumer. “Sentiment is actually improving a little bit, but we’re certainly still far off of where we were back in 2019,” he said.

Separately, Royal Caribbean raised its guidance for adjusted earnings this year by 33 per cent after reporting on Thursday that demand for its cruises and onboard spending were strong in its second financial quarter. Meta and Alphabet this week reported upbeat revenues, in a sign a year-long digital advertising slump may be easing.

Government spending provided a further tailwind to growth, with an uptick in spending by state and local governments. EY’s Daco said the increases may reflect the initial stimulus from programmes such as the Inflation Reduction Act and Chips Act.

President Joe Biden dismissed the notion that the US economy’s continued growth was inevitable or accidental. “It is Bidenomics in action, growing the economy from the middle out and bottom up, not the top down,” he said in a statement, referring to the neologism for his economic agenda.

On Wall Street, yields on US government bonds ticked up shortly after the data was released, but continued their climb through the session. The yield on the benchmark 10-year Treasury gained 0.15 percentage points to 4 per cent, extending its increase from earlier in the day. The two-year note, which is particularly sensitive to short-term interest rate expectations, was up 0.10 percentage points to 4.93 per cent. Yields rise when prices fall.

US stocks reversed early gains, leaving the S&P 500 and Nasdaq Composite both down about 0.6 per cent at Thursday’s closing bell.