US economy grows faster than expected, despite interest rate rises

Fed chairman Jerome Powell says central bank's staff no longer expect a significant downturn this year

Federal Reserve chairman Jerome Powell's news conference is displayed at the New York Stock Exchange. AP
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The US economy grew faster than expected in the second quarter of this year as economists begin to backtrack on forecasts of a coming recession.

The nation's gross domestic product grew by 2.4 per cent, year on year, between April and June, according to the Labour Department's advanced estimate released on Wednesday. Bloomberg economists had expected GDP to grow by 1.8 per cent.

Consumer spending grew by 1.6 per cent, slowing sharply from 4.2 per cent in the first three months of the year.

Federal Reserve Chairman Jerome Powell on Wednesday said the central bank's staff had dropped recession predictions they set in March, when the US economy faced uncertainty over the banking crisis and the threat of a default.

“The staff now has a noticeable slowdown in growth starting later this year in the forecast. But given the resilience of the economy recently, they are no longer forecasting a recession,” Mr Powell told reporters on Wednesday. He noted that staff forecasts are independent from members of the Federal Open Market Committee.

In fighting inflation, the Fed has raised interest rates 11 times since early last year. Wednesday's rate increase of 25 basis points increased the Fed's benchmark rate to the range of 5.25 and 5.5 per cent.

As a result, the higher borrowing costs on the likes of credit cards and car loans have taken a toll on consumer spending. However, the economy appears to be set to avoid being driven into a recession.

Thursday's data points to growing evidence that Mr Powell and his colleagues can still achieve a soft landing.

“It has been my view consistently that we do have a shot,” the Fed chairman said after Wednesday's interest rates decision.

“That’s been my view. That’s still my view … But it’s a long way from assured. And we have a lot left to go to see that happen.”

The latest GDP data also adds to a series of positive US economic news stories and fuels hopes that the US will avoid a recession.

While headline inflation is still above the Fed's 2 per cent target, it has fallen to 3 per cent after peaking at 9.1 per cent last year.

"The economy’s continued growth builds on what was already the strongest pandemic recovery and lowest inflation of any G7 country," President Joe Biden said in a statement.

Meanwhile, the labour market remains strong despite the Fed's aggressive rate increases. Though hiring cooled last month, jobs are still being added at a strong pace and unemployment remains low at 3.6 per cent.

Americans are also more upbeat about the economy than they were earlier in the year. Consumer confidence jumped to its highest level in two years this month, the Conference Board reported on Tuesday, with consumers now feeling unburdened by inflation that has dogged them for the last year.

The International Monetary Fund updated its outlook for projected 2023 US GDP to 1.8 per cent, up from 1.6 per cent in April.

Economists at Goldman Sachs have also downgraded the probability of a recession to 20 per cent in the next 12 months.

Updated: July 28, 2023, 5:23 AM