US economy picks up steam despite expectations of slowdown

The US economy defied expectations of a slowdown as growth accelerated in the second quarter, according to government data released Thursday, supported by business investment and resilient consumer spending.

GDP growth in the world's biggest economy hit an annual rate of 2.4 percent for the April-June period, said the Commerce Department, despite analyst predictions of a cooldown from two percent growth in the first three months this year.

Although economists have been warning of a potential downturn as the US central bank raised interest rates rapidly to tamp down demand and lower inflation, the economy has proven stronger than expected.

In the first quarter, GDP growth was revised sharply higher from initial estimates of 1.1 percent, boosted by consumption in the face of elevated interest rates.

On Thursday, the rise in GDP also "reflected increases in consumer spending, nonresidential fixed investment, state and local government spending" and other areas, said the Commerce Department.

- Cautious consumers -

"Consumers are still willing to spend, but they have become increasingly cautious and selective," said EY-Parthenon chief economist Gregory Daco.

Consumer spending continued to grow by 1.6 percent in the second quarter, slowing from the first quarter, but Daco noted that momentum is moderating on still-high prices and tighter credit conditions.

For now, "real wage growth is turning positive" and helping consumption as inflation cools, he added.

Residential investment declined for a ninth consecutive quarter according to the latest gross domestic product report, although business investment grew 7.7 percent.

Daco said there are encouraging signs "executives are still driving growth despite lingering recession concerns."

The surge in structures investment "continues to reflect the strong impetus" from government spending related to the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act, he added.

- 'Positive trajectory' -

Some analysts think the United States could see a mild recession in the second half of the year. But this likelihood appears to be diminishing on encouraging data with a strong labor market, low unemployment and households still spending -- while inflation eases.

On Wednesday, Federal Reserve chair Jerome Powell told reporters that his staff are no longer forecasting a recession although they still see a "noticeable slowdown in growth starting later this year."

This came after the Fed raised the benchmark lending rate for an 11th time since March 2022, bringing it to the highest level in 22 years.

"Growth is outpacing expectations even as the monetary policy stance has become restrictive," said Rubeela Farooqi, chief US economist at High Frequency Economics.

"A strong household sector that continues to benefit from positive job growth and rising real incomes should keep growth on a positive trajectory this year," she added.

But Daco said the economy "continues to face significant headwinds from persistently elevated prices and costs, tightening credit conditions and rising interest rates."

Other risks include student loan repayments and weak global growth.

Steady growth in consumer spending for the second quarter was a clear reflection of ongoing strength in the job market, said Mike Fratantoni, chief economist of the Mortgage Bankers Association.

"However, the sharp drop in exports shows that this growth in the context of a weak global economy is creating a headwind," he said.