The US economy picked up steam during the spring months, fueled by two key engines: consumer spending and business investment, despite the ongoing conflict with Iran.
Over the past year, the economy has shown remarkable resilience in the face of a series of shocks, including tariffs, the war in Iran, rising oil prices, and stubbornly high inflation. While growth is unlikely to improve significantly, a recession still appears to be a distant prospect.
On Thursday, the US government reported that gross domestic product (GDP) grew at a seemingly weak annualized rate of just 1.5% in the second quarter (April to June). The GDP data is adjusted for inflation. However, this surface-level number carries a crucial caveat: a widening trade deficit and a slowdown in inventory restocking shaved 1.7 percentage points off the growth rate.
If the trade deficit and inventories had been neutral for GDP, the growth rate would have been a much healthier 3% or more. Categories like trade deficits and inventories often distort GDP in the short term but have a smaller impact on the overall economy.
Macro Outlook: Can the Economy Sustain Its Momentum?
Many analysts predict growth will slow slightly in the third quarter as the effect of large tax rebates fades. Rising oil prices and persistently high inflation pose headwinds, and the conflict in Iran remains unresolved. The Federal Reserve could also play a role. The Fed may raise interest rates in the autumn to try and slow inflation, which could further drag on the economy. Overall, despite the many disruptions, the economy appears to be holding steady.
Market Reaction
The Dow Jones Industrial Average and the S&P 500 looked set for a rebound in Thursday trading after a sharp decline on Wednesday. Despite high inflation, the Fed voted on Wednesday to keep interest rates unchanged, which led to the stock market sell-off.
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