Second-quarter GDP still suggests a soft landing
By Joe Higgins, Quest 4 Quality
- Q2 GDP grew at an annualized rate of 2.8%, significantly better than the estimates of 2%.
- It shows that the economy is growing above our normal average while overall prices are cooling.
- This is good news for the Federal Reserve and its fight against inflation, as it improves the chances of a soft landing for the economy.
The defining moment for our economy each quarter is when the Bureau of Economic Analysis (BEA) releases the gross domestic product (GDP).
GDP is defined as the amount of goods and services produced in one year in America, adjusted for inflation. It’s not just any data point; it’s the entire economy added up into one number that explains our performance. It’s like the score at the end of a game.
Initially, I was not expecting much from the Q2 report. Still, the result was over the top, showing in the advance estimate that GDP grew at an annualized pace of 2.8%, significantly better than the 2% growth estimate set by Wall Street.
My first impression was that this set us up for a soft landing, something most economists did not think was possible. It relates to what I have been suggesting all this year: the economy is growing but prices are cooling, allowing the Fed to hold rates steady without the risk of recession.
It’s the Goldilocks economy, “Not too hot, not too cold, but just right,” and now the Fed has the backup needed to take the time to decide on cutting interest rates.
If you are wondering, the term Goldilocks was first applied by a professor at UCLA in 1992. He used it to describe the dot-com-era economy of the ’90s, which was marked by solid growth and low 2% inflation, right at the Fed’s target rate.
Robust consumer spending, rising business inventories and increased government spending drove the second quarter’s GDP growth. A drag on GDP was the rise in imports, as we brought in 6.9% more than last quarter, and exports were only up 2%.
Regarding spending, the personal consumption expenditures report, which the BEA uses for consumer spending, increased by 2.4% and showed acceleration over the first quarter.
A couple of concerning items in the quarterly GDP report were the personal savings rate and the rise in the use of credit cards. Savings fell to 3.5% from their Q1 rate of 3.8%, as consumers are running out of available cash. Over the past four quarters, credit card use has increased credit debt so much that it has surpassed the $1 trillion mark four quarters in a row. Average credit card debt in the U.S. is at its highest level since the Great Recession of 2008.
If the Federal Reserve lives up to its current direction and only cuts rates once in December, Q2 could be the best quarter of the year. We are now experiencing the impact of more than two years of high interest rates, which have increased 525 basis points since March 2022. It was bound to impact consumer spending at some point.
On the other hand, the markets priced in a 99% chance of a rate cut in late Q3, prior to this week’s stock market slide. While it is not a certainty, even a small drop in rates could have a significant impact on the stock market and consumer spending.
Bottom Line
Even though our economy has enjoyed two good years, it is essential to note that the Fed has actively been trying to slow it down with rate hikes. They have failed in most areas, as spending, retail sales, manufacturing, GDP and, until recently, employment, have all shown improvement in the face of high interest rates.
The only sector of the economy that the rate hike has impacted is housing, as 30-year mortgages are still near 7%. This has significantly affected the home goods business, as lower home sales translate into reduced demand for appliances, electronics and furniture.
Don’t worry, though; change is in our future and rates will surely come down next year.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.
