Avoiding US Recession... Strong GDP Growth Despite High-Intensity Interest Rate Hikes (Update)

The US economy grew at an annualized rate of 2.4% in the second quarter, significantly surpassing market expectations of 2.0%. Despite persistently high inflation and over a year of aggressive interest rate hikes, the solid economic indicators have eased concerns about a recession hitting within the year.

[Image source=Reuters Yonhap News]

According to the US Department of Commerce on the 27th (local time), the preliminary estimate for second-quarter Gross Domestic Product (GDP) growth was 2.4% annualized. This exceeds not only the first quarter's 2.0% but also the market forecast of 2.0%. It dispelled fears of a recession caused by high interest rates. This result aligns with the Federal Reserve's (Fed) statement the previous day that "economic activity is expanding at a moderate pace," reinforcing economic confidence after another rate hike. The Department of Commerce releases GDP data in preliminary, revised, and final estimates.

The second-quarter growth was driven by increases in consumer spending and federal and state government expenditures. Consumer spending, which accounts for more than two-thirds of economic activity, rose by 1.6%. Notably, spending on services (2.1%) increased more than on goods (0.6%). This indicates that despite inflation and high interest rates, American consumers are still opening their wallets. Nonresidential fixed investment saw its largest increase in over a year. Although housing investment declined for the ninth consecutive quarter due to high mortgage rates and other factors, new construction is on the rise due to a shortage of existing homes, suggesting improvements within a few months.

Signals of easing inflationary pressures were also reaffirmed. The second-quarter Personal Consumption Expenditures (PCE) price index rose 2.6%, significantly below the first quarter's 4.1% and market expectations of 3.2%. This slowdown in inflation is viewed positively as it could further support consumer spending. Michael Gapen, Chief US Economist at Bank of America (BoA), commented, "The things that scared us all earlier this year have disappeared." Rubila Faruqi, Chief US Economist at High Frequency Economics, also noted, "Despite a restrictive monetary policy stance, growth exceeded expectations."

Even markets that initially predicted a recession are increasingly optimistic about a soft landing. The Wall Street Journal (WSJ) reported, "Economists who expected a recession to start mid-year are now revising their forecasts." Goldman Sachs recently lowered the probability of a recession within the next 12 months from 25% to 20%. Amy Crone Kurt, Chief Economist at AC Kurt & Associates, said, "We have turned a dangerous corner," adding, "Instead of heavily weighting a recession, we are balancing between recession and no recession." Fed Chair Jerome Powell also confirmed the previous day that the Fed has revised its economic outlook away from expecting a recession within the year.

The unemployment data released the same day indicated that the US labor market remains robust. According to the US Department of Labor, initial jobless claims for the week of July 16?22 fell by 7,000 to 221,000, marking the third consecutive week of decline and the lowest level in five months since February. Continued claims, which track those receiving unemployment benefits for at least two weeks, also dropped by 59,000 to 1.69 million, the lowest since January. Bloomberg News described the strong labor market as a key pillar still supporting the economy.

Durable goods orders also increased for the fourth consecutive month in June. According to the US Department of Commerce, June durable goods orders rose by $13.6 billion (4.7%) from the previous month to $302.5 billion, far exceeding the expert forecast of a 1.5% increase. Orders for nondefense capital goods excluding aircraft, which indicate business investment intentions, also rose by 0.2%, slightly beating expectations. The following day, the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, will be released. The US core PCE price index for June is expected to have risen 4.2% year-over-year, down from 4.6% the previous month.

With economic indicators repeatedly surpassing expectations, the Fed, which has raised rates 11 times since March last year, cannot rule out further hikes in September. Currently, the market largely expects the Fed not to raise rates again this year. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently prices in a 76% chance that the Fed will hold rates steady at the September FOMC meeting. Anna Wong, an economist at Bloomberg Economics, said, "Second-quarter GDP growth reflects economic strength that counters the Fed's efforts to reduce inflation," adding, "If the expected recession this year is delayed, the Fed will likely have to raise rates beyond current levels."

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