US economy expands 2.8% in second quarter, beating expectations

The U.S. economy posted robust growth in the second quarter, driven by strong consumer and government spending, along with a significant increase in inventories, according to an initial estimate from the Commerce Department released Thursday.

From April to June, real gross domestic product (GDP), which measures the value of all goods and services produced, grew at an annualized rate of 2.8% after adjusting for seasonality and inflation. That beat the 2.1% growth forecast by economists polled by Dow Jones and improved from the 1.4% growth in the first quarter.

The first of three estimates highlighted the significant contributions of consumer spending, private inventory investment, and nonresidential fixed investment to GDP growth. Personal consumption expenditures, a key indicator of consumer activity, rose 2.3% in Q2, up from 1.5% in Q1, with solid gains in both services and goods.

Inventories contributed 0.82 percentage points to overall growth, while government spending provided further support, rising 3.9 percent at the federal level, including a 5.2 percent increase in defense spending.

However, imports rose by 6.9%, the highest quarterly increase since the beginning of 2022, which weighed negatively on GDP, while exports grew by only 2%.

Following the report, stock market futures rose and Treasury yields fell.

Joseph Brusuelas, chief economist at RSM, said: “The composition of growth is among the best we have seen in some time. This report supports the idea that the U.S. economy is experiencing a productivity boom, which will improve living standards through lower inflation, high employment and rising real wages.”

On the inflation front, the Personal Consumption Expenditures (PCE) price index, a key measure for the Federal Reserve, rose 2.6% in the quarter, down from 3.4% in the first quarter. Core PCE prices, which exclude food and energy and are closely monitored by the Fed, rose 2.9%, down from 3.7% in the previous quarter.

The chain-weighted price index, which takes into account changes in consumer behavior, rose 2.3 percent in the second quarter, below the 2.6 percent forecast.

Treasury Secretary Janet Yellen, speaking in Rio de Janeiro, said the GDP report “confirms our trajectory toward steady growth and declining inflation.”

Final sales to domestic private buyers, a strong indicator of underlying demand, rose 2.6%, in line with the previous quarter. However, the personal savings rate continued to decline, falling to 3.5% from 3.8% in Q1.

Despite solid retail sales data that indicated consumers were resilient in the face of high interest rates and inflation, there were signs of stress in consumer finances. The Philadelphia Federal Reserve reported record credit card delinquencies and rising revolving debt balances, even as banks tightened credit standards and issued fewer new cards.

The housing market also faces challenges: declining sales and rising home prices are putting pressure on first-time home buyers.

Federal Reserve officials are expected to keep current interest rates at their next meeting, although market signals suggest a potential rate cut in September, the first in four years. Policymakers have been cautious but increasingly open to easing monetary policy, with most indicating that further rate hikes are unlikely.

Additionally, the Labor Department reported 235,000 initial jobless claims for the week ended July 20, down 10,000 from the previous week and in line with expectations. Continuing claims fell slightly to 1.85 million.

In other economic news, durable goods orders fell 6.6% in June, defying expectations for a 0.3% increase. However, excluding transportation, new orders rose 0.5%.