US Economy Expanded 2.8 Percent in 2nd Quarter, Fueled by Consumer Spending

Shoppers and pedestrians walk up Broadway in New York City on July 16, 2024. Mario Tama/Getty Images

The U.S. economy continued to expand in the second quarter, topping economists’ expectations and shrugging off the Federal Reserve’s 23-year high interest rates.

According to the advanced estimate from the Bureau of Economic Analysis on July 25, the U.S. economy grew at an annualized pace of 2.8 percent in the April–June period, up from 1.4 percent in the first quarter.

The better-than-expected reading was fueled by a 2.3 percent gain in consumer spending for goods and services, contributing 1.57 percent to the final reading. Consumer spending accounted for roughly 68 percent of growth in the economy last quarter.

Additionally, the expansion reflected a 3.6 percent increase in private inventory investment in the retail and wholesale trade industries and a 5.2 percent boost in nonresidential fixed investment. These contributed 1.46 percent to the GDP rate.

Net exports of goods and services rose by 2 percent in the three months ending June 30.

Government spending ballooned by 3.1 percent, accounting for 0.53 percent of the real GDP growth rate. As a share of the economy, government consumption at all three levels represented about 19 percent.

The GDP price index—an inflation gauge of the prices of goods and services produced in the United States—rose at a slower-than-expected pace of 2.3 percent, down from 3.1 percent in the previous quarter.

Personal consumption expenditure (PCE) prices advanced by 2.6 percent, down from 3.4 percent. Core PCE, which strips the volatile energy and food components, surged at a higher-than-expected rate of 2.9 percent.

Heading into the second-quarter GDP report, the Federal Reserve Bank of Atlanta’s GDPNow Model estimated a reading of 2.6 percent.

The next major economic report will be the June PCE price index. The consensus estimate for the Fed’s preferred inflation report is 2.4 percent.

Market Reaction

Leading stock market benchmark indexes mostly declined in July 25. The  S&P 500 and Nasdaq Composite fell, while the Dow Industrial Average rose 81.20, or 0.2 percent.

The U.S. Treasury market was mostly red across the board, with the benchmark 10-year yield sliding to about 4.24 percent. The 2-year yield rose above 4.43 percent, and the 30-year bond declined to 4.49 percent.

The U.S. dollar index, a measurement of the greenback against a basket of currencies, erased its early losses and was flat after the GDP data.

The White House celebrated the GDP report, saying that the second-quarter data make clear that “we now have the strongest economy in the world.”

“Thanks to my and Vice President Harris’s economic agenda, our economy grew a robust 2.8% over the last quarter, based on strong American consumers and business investment,” President Joe Biden said in a statement.

Despite the first-half growth performance, Scott Anderson, the chief U.S. economist at BMO, said he still believes economic activity is “about to downshift into a below potential path in the second half of the year.”

“Earnings reports have been lackluster so far this earnings season, consumers are showing signs of tiring, and business capital investment will likely see a lull,” Mr. Anderson said in a note. “Election and fiscal policy uncertainty will likely add to the malaise until businesses get more clarity about the future path of tax and spending policies of the Federal government and the shape of the economic slowdown.”

What Experts Say Is Ahead

A chorus of economists have said that the U.S. economy will likely reaccelerate later this year and experience faster activity in 2025.

In a recent forecast about the economy, economists at the Conference Board stated that consumer spending will cool further, leading to real GDP growth slowing to about 1 percent in the third quarter.

“GDP growth should pick up later in 2024 as inflation subsides and the Fed first signals and then actually cuts interest rates,” the group said. “In 2025, 2-percent inflation and somewhat lower interest rates should levitate real GDP growth to its potential near 2 percent. Nonetheless, the timing and pace of interest rate cuts remains highly uncertain and policy rates may ultimately land at levels exceeding the pre-pandemic average.”

Recent data do suggest that shoppers are becoming more conscious. Retail sales stalled in June at 0 percent, while personal spending edged up by just 0.2 percent in May.

As inflation eases and the economy slows, the futures market has penciled in a quarter-point rate cut at the September policy meeting, according to the CME FedWatch Tool.

Meanwhile, the International Monetary Fund (IMF) recently released its world economic outlook growth projections. Officials have said that the United States will be the top-performing advanced economy this year, growing at a rate of 2.6 percent.

However, the IMF report suggests that real U.S. GDP growth will slow next year, easing to 1.9 percent. Instead, Canada could be the best-performing advanced economy in 2025, expanding by 2.4 percent, the global institution noted.

“Growth in major advanced economies is becoming more aligned as output gaps are closing,” IMF chief economist Pierre-Olivier Gourinchas said. “The United States shows increasing signs of cooling, especially in the labor market, after a strong 2023.”

Last month, the unemployment rate climbed above 4 percent.

But Torsten Slok, the chief economist at Apollo, said he wonders where the slowdown talk is coming from, citing a plethora of daily and weekly data that “do not show any signs of a drop-off in economic activity.”

“Instead, the data shows ongoing steady growth around potential, similar to what we have seen over the past year,” he said in a note. “If the Fed starts cutting rates in September, then stock prices will rise further, credit spreads will tighten, and growth and inflation will start to reaccelerate.”

Early models suggest that the July–September period could be a solid quarter, with the New York Fed Staff Nowcast pointing to 2.66 percent growth.

Other Data

Durable goods orders plunged by 6.6 percent in June, down from 0.1 percent in May. The consensus estimate called for 0.3 percent growth.

On the labor front, initial jobless claims eased to 235,000 for the week ending July 20, down from the previous week’s upwardly revised 245,000, according to the Department of Labor.

Continuing jobless claims eased to 1.85 million, while the four-week average, which removes week-to-week volatility, edged up slightly to 235,500.