Markets moved higher and fears of a global economic recession were eased when the U.S. GDP grew at a faster-than-expected rate, increasing at a 2.4% annualized rate for the April to June period (Q2), exceeding the earlier 2% estimate by Dow Jones while improving over Q1 GDP growth of 2 percent.
Growth has been positive Q2 of 2022, when GDP fell at a 0.6 percent rate. Powering the growth was consumer spending aided by government spending.
Even more importantly, the personal consumption expenditures price index increased 2.6 percent, down from a 4.1 percent rise in Q1 and well below the Dow Jones estimate for a gain of 3.2 percent, a good sign that inflation was under control.
Consumer spending increased 1.6 percent and accounted for 68 percent of all economic activity during the quarter, a pullback from the 4.2 percent increase in Q1 but still resilient amid higher interest rates.
Gross private domestic investment increased by 5.7 percent after dropping 11.9 percent in Q1.
Government spending increased by 2.6 percent.
More good news came with orders for items such as vehicles, computers and appliances rising 4.7 percent in June, much higher than the 1.5 percent estimate, according to the U.S. Commerce Department. Also, weekly jobless claims totaled 221,000, a decline of 7,000 and below the 235,000 estimates, and the economy added 209,000 jobs in Q2.
Nonfarm payrolls have grown by about 1.7 million so far in 2023 and the 3.6% unemployment rate for June equals that of 2022.
The Federal Reserve has hiked interest rates 11 times since March 2022 and markets believe last Wednesday’s 25 basis points hike will be the last of this tightening cycle, bringing the benchmark rate to a 22-year high of between 5.25% and 5.5%. Inflation has fallen significantly from a peak last summer but remains 1 percentage point above the Federal Reserve’s target of 2%.
Fears of a recession had cast a thundercloud over the economy for many months and despite the good economic news for Q2, markets that bet on the likelihood of a recession pushed the 2-year Treasury yield well above that for the 10-year note, leading to an inverted yield curve that usually points to a recession in the next 12 months.
To confirm a recession, two consecutive quarters of shrinking in a nation’s GDP much occur, a shrinking window for this to happen in what’s left in 2023.
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