The U.S. economy expanded by an annual rate of 2.4 percent between April and June, powered by brisk consumer and government spending, marking an acceleration of growth from the first three months of the year.
U.S. Economy Continues to Grow Despite Fed’s Rising Interest Rates
Source: The Washington Post
The new gross domestic product figures, released Thursday by the Bureau of Economic Analysis, showed the economy expanded for the fourth straight quarter in a row, casting doubt on predictions of a recession this year.
The economy’s resilience, bolstered by a healthy job market, has surprised even the most optimistic economists. It has also forced the Federal Reserve to extend its aggressive fight against inflation with another interest rate hike on Wednesday, pushing borrowing costs to a new 22-year high. Fed staff, who a few months ago had worried about a “mild” recession, are no longer forecasting an imminent downturn.
“The economy has remarkably avoided a recession,” said Diane Swonk, chief economist at KPMG. “That’s put the Fed in a nice position; it’s emboldened them to really go all-in against inflation. But the question is: How long can this strength persist? Are there still effects from higher interest rates that we haven’t seen yet?”
Still, the mood among economists is decidedly upbeat. The latest wave of encouraging data — showing falling inflation, rock-bottom unemployment and accelerating economic growth — has many rethinking their recession forecasts. Major Wall Street banks are drawing down the odds of a downturn, saying it looks increasingly likely that the economy can stave off a recession, at least until next year. A ‘soft landing,’ the Fed’s term for bringing down inflation without spurring massive job losses or recession, also seems more plausible.
“There will be a point, due to rising business costs and higher consumer finance costs, that the economy will slow,” said Joe Brusuelas, chief economist for RSM US. “But right now, the argument for a ‘soft landing’ is clearly resonating in a way it hasn’t over the past two years.”
But some say the economy is running too hot, which means the central bank may have to keep borrowing costs elevated for longer, which could trigger a deeper downturn.
“Growth remains sturdy but we haven’t thrown in the towel yet on a possible recession because we’re in a unique period for the Federal Reserve,” said Kathy Bostjancic, chief economist for Nationwide Mutual Insurance Company. “They’re looking to hold rates [high] for a while, which is unusual, because typically they raise rates then cut them soon after. The fact that they’re embarking on this new paradigm could still weigh on the economy.”
There are growing signs that the Fed’s tightening is beginning to work its way across sectors: The housing market has slowed sharply in the past year, manufacturing is down, and employers are posting fewer jobs. Households, which until recently had been splurging on travel and big-ticket items, are also becoming more cautious with their money.
Consumer spending, which jumped by 4.1 percent at the beginning of the year, has moderated since then, rising by 2.6 percent in the most recent quarter. Much of that growth was fueled by spending on essential services — including housing, utilities and health care — as well as an uptick in families buying recreational goods, vehicles and gas.
“Consumers are still spending — they’re not retrenching, by any means — but they are being more careful,” said Gregory Daco, chief economist at EY-Parthenon. “That slowdown is only going to continue as people spend down their extra savings and start paying their student loans again.”
But the emerging trepidation among consumers is largely being offset by a burst of new spending by the government and businesses. The Biden administration’s robust investment in infrastructure projects, for example, including new bridges and roads, airport improvements and manufacturing plants for electric vehicles, appears to be spurring widespread private investments and boosting the overall economy far earlier than many had predicted.
Business investments in infrastructure, such as manufacturing plants and transportation equipment, lifted GDP by nearly 1 percent in the most recent quarter — a dramatic swing the previous quarter, when it dragged down the reading by more than 2 percent.
Morgan Stanley last week made a “sizable upward revision” to its GDP expectations for the year — raising its annual forecast threefold, from 0.4 percent to 1.3 percent — citing ongoing federal investments.
“The economy in the first half of the year is growing much stronger than we had anticipated,” Ellen Zentner, chief U.S. economist for Morgan Stanley, wrote in a research note last week. “The Infrastructure Investment and Jobs Act … is driving a boom in large-scale infrastructure.”
The Biden administration has so far allocated $225 billion in infrastructure funding toward 35,000 projects across the United States. Private companies have announced another $503 billion in related investments, White House data shows.
In Beaverton, Ore., Tina Adams’s engineering firm expects a 25 percent increase in revenue this year, which she attributes to a flurry of new government-backed infrastructure projects. She has added three new engineers to her workforce of 10 to keep up, and she says the boom in federal work has more than made up for stalling local projects.
“I can say with a straight face that of 25 contracts and projects we have, almost all of those — 23 of them — are federally funded in some way,” said Adams, founder of Casso Consulting. “These are short-term jobs, but they have very long-lasting effects. We are looking down the barrel of a whole lot more work opportunities.”
Adams’s firm, which specializes in public works designs, is among the first to benefit from the burst of federal funding. She and her staff of engineers are already laying out drainage routes and utility moves for a number of large-scale projects: replacing bridges, widening highways, creating bike lanes and adding wheelchair ramps to sidewalks.
“It’s already had a direct impact and created an environment where we could hire more people and work on more projects,” Adams said. “But this is just the first step. There’s a whole lot more coming down the pipeline.”