Moderate US economic growth expected in second quarter
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[July 27, 2023] By
Lucia Mutikani
WASHINGTON (Reuters) - The U.S. economy likely maintained a moderate
pace of growth in the second quarter as labor market resilience
underpinned consumer spending, while businesses boosted investment in
equipment and built more factories, potentially keeping a much-feared
recession at bay.
The Commerce Department's snapshot of second-quarter gross domestic
product on Thursday is also expected to show the housing market slump
nearing an end. Outside the housing market and manufacturing, the
economy has largely weathered the 525 basis points in interest rate
hikes from the Federal Reserve since March 2022 as the U.S. central bank
battled inflation.
Economists have since late 2022 been forecasting a downturn, but with
price pressures retreating, some now believe that the soft-landing
scenario for the economy envisaged by the Fed is feasible. The central
bank on Wednesday raised its policy by 25 basis points to a 5.25%-5.50%
range.
"This will be another indication that the economy is not tipping into
recession. Much of the effect of the rate hikes already has occurred,"
said Dean Maki, the chief economist at Point72 Asset Management in
Stamford, Connecticut. "As long as the Fed is content that inflation is
moderating at a fast enough pace, they're not going to implement the
kind of additional rate hikes that would be needed to bring about a
recession."
According to a Reuters survey of economists, GDP growth likely increased
at a 1.8% annualized rate last quarter after rising at a 2.0% pace in
the first quarter.
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Consumer spending, which accounts for more than two-thirds of U.S.
economic activity, likely remained a pillar of support, although the
pace of growth slowed from the second quarter's robust 4.2% rate.
Spending on long-lasting manufactured goods has slowed after booming
during the COVID-19 pandemic. Services spending is, however, taking up
some of the slack.
Spending is being propped up by excess savings accumulated during the
pandemic, estimated by economists to be as much as $2.1 trillion at one
point, debt and strong wage gains from the tight labor market as
companies hoard workers after struggling to find labor during the
pandemic. That is underscored by persistently low levels of layoffs.
The weekly jobless claims report from the Labor Department on Thursday
is likely to show first-time applications for state unemployment
benefits rising 7,000 to a seasonally adjusted 235,000 for the week
ended July 22, according to a Reuters poll.
The number of people receiving benefits after an initial week of aid, a
proxy for hiring, is seen falling to 1.750 million during the week
ending July 15 from 1.754 million in the prior week. This covered the
week that the government surveyed households for July's unemployment
rate. At 3.6% in June, the jobless rate was not too far from
multi-decade lows.
"There are some pockets of job losses being announced here and there,
but it does appear that people are getting jobs rather quickly if they
are losing their jobs," said Mike Skordeles, head of U.S. economics at
Truist Advisory Services in Atlanta.
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![](../images/072723PIX/busine12.jpg)
Real estate signs advertise new homes
for sale in multiple new developments in York County, South
Carolina, U.S., February 29, 2020. REUTERS/Lucas Jackson/File Photo
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FACTORY CONSTRUCTION BOOMING
Business investment likely accelerated after almost stalling in the
first quarter, thanks to an anticipated rebound in spending on
equipment like aircraft and motor vehicles.
Efforts by President Joe Biden's administration to bring
semiconductor manufacturing back to the United States are boosting
factory construction. Investment in nonresidential structures like
factories probably remained robust last quarter, contributing to the
economy's resilience.
Further contribution to GDP growth was expected from government
spending. Trade was likely a drag after adding to growth for four
straight quarters.
Inventory investment is a wild card, though most economists are
penciling in a contribution to GDP growth of at least five tenths of
a percentage point. Business sharply reduced inventory accumulation
in the January-March quarter in anticipation of weaker domestic
demand, slicing 2.14 percentage points off GDP growth that period.
Though residential investment, which includes homebuilding, likely
contracted for the ninth straight quarter, the decline was probably
the shallowest in 1-1/2 years.
In the past, when the economy was heading into recession,
homebuilding and auto production plunged. But these cyclical parts
of the economy, including new home sales and auto sales are picking
up, raising cautious optimism that the economy could skirt a
recession, even as some analysts expected GDP to turn negative at
some point.
"We'll see some slowing in the second half of the year, and possibly
negative GDP in the first quarter," said Sean Snaith, director of
the University of Central Florida's Institute for Economic
Forecasting. "But will it rise to the level of a recession? That's
less clear."
But some economists remain convinced that a recession is on the
horizon, arguing that higher borrowing costs will eventually make it
harder for consumers to fund their spending with debt.
They also noted that banks were tightening credit and excess savings
continued to be run down. Slowing job growth was seen curbing wage
gains.
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"What we've been used to in the last couple of downturns is that
everything kind of turns down at the same time," said Richard de
Chazal, macro analyst at William Blair in London.
"What's different this time is that we're just seeing a slowdown
that's being driven by the Fed. Over time rates are going to
increasingly bite and the chances of a recession are higher than not
having one."
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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