GDP Growth Rate 2.8%... Core PCE Up 2.9%
US Economy Soft Landing Expectations Spread
Concerns Over Economic Slowdown Eased "September Rate Cut"
The U.S. economy grew at a faster-than-expected pace in the second quarter of this year. Inflation slowed to the 2% range, raising hopes for a 'Goldilocks' scenario (an ideal economic condition that is neither too hot nor too cold). While some have raised concerns about a recession and called for an early rate cut in July, the U.S. economy remains robust, leading the market to expect the Federal Reserve (Fed) to implement its first rate cut in September.
According to the U.S. Bureau of Economic Analysis (BEA) on the 25th (local time), the advance estimate of real Gross Domestic Product (GDP) for the second quarter showed a 2.8% annualized growth rate compared to the previous quarter. This is double the first quarter growth rate (1.4%) and significantly exceeds the Wall Street Journal (WSJ) experts' forecast of 2.1%.
Household spending, which accounts for two-thirds of the U.S. real economy, increased by 2.3% compared to the previous quarter, showing a strong recovery from the first quarter growth rate of 1.5%. Both goods and services expenditures rose.
The Commerce Department explained, "The increase in private inventory investment and expanded consumer spending contributed to the rise in GDP growth in the second quarter," adding, "However, this was partially offset by a slowdown in residential fixed investment."
Concerns arose that the U.S. economy had entered a slowdown phase due to cumulative high-intensity tightening, as recent signs showed the U.S. labor market cooling. The unemployment rate steadily rose, reaching 4.1% in June, the highest in two and a half years. However, the second quarter GDP growth rate far exceeded expectations, confirming that the U.S. economy is still in an expansion phase.
On the other hand, inflation appeared to have eased. The core Personal Consumption Expenditures (PCE) price index, excluding food and energy, slowed from 3.7% in the first quarter to 2.9% in the second quarter. The economy continues to grow solidly while prices and employment are gradually cooling, raising expectations for a soft landing.
With the second quarter's stronger-than-expected GDP and easing inflation, expectations that the U.S. economy will achieve a Goldilocks scenario have increased, strengthening the outlook for a rate cut in September. Although William Dudley, former president of the New York Federal Reserve Bank and a known hawk (favoring monetary tightening), advocated for a July pivot (policy shift) the day before, recession concerns have eased, and it is now expected that there will be no surprise rate cut at the Federal Open Market Committee (FOMC) meeting on the 30th-31st.
According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market fully prices in a 100% probability that the Fed will cut rates by at least 0.25 percentage points at the September FOMC meeting. The probability of a cut of 0.5 percentage points or more is 10.5%.
Ryan Sweet, U.S. economist at Oxford Economics, stated, "The acceleration in U.S. economic growth will ease concerns about the sustainability of the expansion and the calls for the Fed to cut rates in July." Steven Brown, economist at Capital Economics, analyzed, "With second quarter GDP growth at 2.8%, the Fed is expected to keep policy unchanged at next week's FOMC. However, recent easing in labor market conditions and signs of slowing inflation provide strong grounds for a rate cut at the September FOMC meeting."
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