July 27, 2023 | 09:33
U.S. GDP: Swift Business Investment Levels Up Growth
The U.S. economy accelerated in the second quarter, led by surging business investment. Real GDP growth sped up to 2.4% annualized in Q2 from the prior tally of 2.0%. The acceleration came despite an anticipated slowing in consumer spending growth to 1.6% versus a 4.2% gain in the prior quarter. Households appear to be more constrained in this high inflation and interest rate environment. For evidence on that, look no further than real motor vehicle output rocketing up nearly 20%, while spending on new vehicles sagged 10.6%. There still appears to be some pent-up demand left in the tank, as spending on admissions to live entertainment (excluding sports) is nearly back to its 2019Q4 level in nominal terms (the Taylor Swift effect?). That didn't extend to food services and accommodation spending, which dipped 2.9%. On the other side of the ledger, the CHIPS Act and the Inflation Reduction Act are helping to spur a rebound in business investment, which surged 7.7% after growing a meager 0.6% last quarter. Both real manufacturing and multifamily housing investment perked up to 20-year highs. Export volumes reversed course, as the goods trade deficit widened by 1.1%, but falling imports overall led to a mild narrowing of the overall trade deficit. Government spending continues to spur the economy, but growth was cut nearly in half to 2.6% from 5.0% in the previous quarter.
While the higher-than-expected growth numbers likely raised some eyebrows at the Fed (the June SEP had 1.0% growth penciled in for 2023), the GDP deflator slowed considerably to 2.2% in Q2 compared to 4.1% last quarter. That brought nominal GDP growth down to 4.7%, which is back in line with its pre-pandemic range. Final sales (domestic spending on consumption and investment) slowed to 2.3%, more or less in line with its pre-COVID trend.
Bottom Line: With the U.S. economy a year removed from recording consecutive negative GDP growth, real GDP is up by 2.6%, the economy has added 3.8 mln new jobs, and headline inflation has fallen back to 4%. While the headline growth figure raises the odds the Fed may have to consider further hikes later this year, slowing consumer spending and inflation may give them comfort that higher interest rates are having the desired effect on the economy.