US economy defies recession fears with strong Q2 performance

WASHINGTON: The US economy grew faster than expected in the second quarter as a resilient labor market supported consumer spending, while businesses boosted investment in equipment and built more factories, potentially keeping a much-feared recession at bay.

Despite the broad-based acceleration in growth reported by the Commerce Department on Thursday, inflation subsided considerably last quarter, with one of the key measures tracked by the Federal Reserve for its 2% target posting its slowest increase in more than two years.

Economists, some of whom have been forecasting a recession since 2022, believed the US central bank’s fastest interest rate hiking cycle since the 1980s was drawing to a close, though strong domestic demand could see it keeping borrowing costs higher and for longer.

The Fed on Wednesday raised its policy rate by 25 basis points to the 5.25%-5.50% range.

“Despite the Fed’s campaign to slow growth and snuff out inflation, no recession is in sight,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “Stop raising rates for now.” Gross domestic product increased at a 2.4% annualized rate last quarter, the government said in its advance estimate of second-quarter GDP. The economy grew at a 2.0% pace in the January-March quarter. Economists polled by Reuters had forecast GDP would rise at a 1.8% rate in the April-June period.

The government’s measure of inflation in the economy, the price index for gross domestic purchases, rose at a 1.9% rate, the slowest in three years. This followed a 3.8% pace of increase in the first quarter.

Even more encouraging, the personal consumption expenditures price index (PCE) excluding food and energy advanced at a 3.8% rate. That was the smallest gain since the first quarter of 2021 and was a slowdown from the 4.9% pace logged in the January-March quarter. The Fed watches the PCE price indexes for monetary policy.

“It may be too soon to talk about Goldilocks, but there have been some favorable supply-side developments lately that could have legs,” said Michael Feroli, chief US economist at JPMorgan in New York.

Outside housing and manufacturing, the economy has largely weathered the 525 basis points in rate hikes from the Fed since March 2022. Most economists are now confident the “soft landing” scenario - in which inflation falls, unemployment remains relatively low and a recession is avoided - is feasible.