U.S. economic activity was significantly stronger than expected in the second quarter, driven by strong consumer spending, government spending and a significant increase in inventories, according to initial estimates released by the Commerce Department on Thursday.
Real gross domestic product, which measures all goods and services produced between April and June, increased at an annual rate of 2.8%, adjusted for seasonally and inflation. Economists surveyed by Dow Jones had expected growth of 2.1%, following a 1.4% increase in the first quarter.
The first of three estimates provided by the ministry shows that consumer spending helped drive growth, while private inventory investment and nonresidential fixed investment also contributed.
The Bureau of Economic Analysis’ Consumer Activity Report, a key proxy measure, said personal consumption spending rose 2.3 percent in the first quarter, up from a 1.5 percent increase in the first quarter. Spending on services and goods both showed solid quarterly gains.
Inventories also contributed significantly, adding 0.82 percentage points to total earnings. Government spending also provided a tailwind, rising 3.9% at the federal level, led by a 5.2% jump in defense spending.
Meanwhile, imports subtracted from GDP surged 6.9%, the biggest quarterly gain since the first quarter of 2022. Exports rose just 2%.
After the report was released, stock market futures rose and Treasury yields fell.
“The mix of growth is one of the best we’ve seen in some time,” said Joseph Brusuelas, chief economist at RSM. The report “tends to support the idea that the U.S. economy is in the midst of a productivity boom that will drive lower inflation, lower employment, and higher real wages across the country over the medium term.”
There was some good news on the inflation front. The Fed’s key measure, the personal consumption expenditures price index, rose 2.6% quarterly, down from 3.4% in the first quarter. Core PCE prices, excluding food and energy, which the Fed focuses more on as a longer-term inflation gauge, rose 2.9%, compared with 3.7% in the previous period.
The so-called “chain-weighted price index,” which reflects changes in consumer behavior, rose 2.3% in the quarter, below estimates of 2.6%.
Treasury Secretary Janet Yellen, in a speech Thursday morning in Rio de Janeiro, called the GDP report “confirming our path toward steady growth and declining inflation.”
Final sales to private domestic buyers, which the Fed views as a good indicator of underlying demand, was another key variable, rising at a 2.6% pace, the same as the previous quarter.
However, the report noted that the personal savings rate continued to decline, falling to 3.5% in the fourth quarter from 3.8% in the first quarter.
Signs of cracks have emerged in the consumer market recently.
Credit card delinquencies are at an all-time high, according to data from the Philadelphia Federal Reserve Bank on Wednesday, with data from 2012 showing that revolving debt balances have also hit new highs as banks tighten credit standards and report a decline in new card issuance.
But retail sales figures continue to rise, showing that consumers are weathering the headwinds of high interest rates and persistent inflation.
The housing market is also under pressure. Sales are down while home prices continue to rise, putting stress on first-time homebuyers.
Federal Reserve officials are expected to keep rates steady at their meeting next week, but markets are pricing in a September cut for the first time in four years. Policymakers have been cautious about when to cut rates, but recent comments have signaled a greater willingness to start easing policy, with most central bankers saying further hikes are unlikely.
In other economic news Thursday, the Labor Department reported that initial claims for unemployment benefits totaled 235,000 for the week ending July 20, down 10,000 from the previous week and exactly in line with Dow Jones forecasts. Continuing claims, which are lagging by a week, fell slightly to 1.85 million.
Also, orders for durable goods (typically big-ticket items like airplanes, appliances and computers) unexpectedly fell 6.6% in June, compared with expectations for a 0.3% increase. Excluding transportation, however, new orders rose 0.5%.