The American economy has been showing extreme resilience. The Federal Reserve raised interest rates consistently for the last seventeen months. During these seventeen months, the U.S. economy was supposed to cripple because the central bank implemented quantitative tightening.
When quantitative tightening is implemented, the central bank reduces its balance sheet by selling government bonds. This process removes money from financial markets. And when money is removed from financial markets, credit markets become contracted, which means that the cost of borrowing becomes expensive and the price of investments falls. Thus, the economy grows at a much slower pace. However, during these seventeen months of quantitative tightening, this is not what we’ve witnessed. What we’ve witnessed is a resilient economy, especially a resilient labor market and a stock market that ended up in bullish territories.
GDP Growth, Q2
Source: Yahoo Finance/ U.S. Bureau of Economic Analysis
The U.S. economy grew faster than expected in Q2 2023. The Bureau of Economic Analysis reported on July 27, 2023, that GDP grew at an annualized rate of 2.4% in the second quarter, up from 2% in the first quarter. This was faster than the consensus forecast of 1.8%.
The growth was driven by strong consumer spending, which rose at an annualized rate of 3.3% in the second quarter. Business investment also grew at a healthy pace, rising at an annualized rate of 10.1%.
The report was a welcome sign for economists, who had been concerned that the economy was slowing down. The growth in Q2 suggests that the economy is still expanding but at a more moderate pace than in previous quarters.
The Department of Labor announced 221,000 people filed jobless claims in the week ending July 22, the lowest number of claims since February. Meanwhile, data from the U.S. Census Bureau showed durable goods orders increased 4.7% in June.
The labor market remained strong, with the unemployment rate falling to 3.6% in June. Wages continued to rise, albeit at a modest pace. Consumer confidence remained high and business sentiment was also positive. All these factors contributed to a stronger growth than expected in the second quarter of 2023.
There are some risks to the economy in the near term, including rising inflation and the potential for a trade war between the United States and China. However, for now, the economy seems to be on track to avoid a recession. Jerome Powell, in his press conference, stated that the Federal Reserve no longer forecasts a recession as the economy continues to be resilient and beats expectations. Some economists have even claimed that the Federal Reserve might consider cutting rates as early as November or December if inflation hits its 2% target by the next Fed meeting in September.
The strong growth in Q2 is a good sign for the economy, but it is important to note that the pace of growth is likely to slow in the coming quarters. The Federal Reserve is expected to raise interest rates several times this year, which will likely weigh on economic growth. However, for now, the economy seems to be on solid footing.