US growth unrevised at 2.1% in Q2 as economy shows resilience

The US economy maintained a fairly solid pace of growth in the second quarter and activity appears to have accelerated this quarter, but a looming government shutdown and an ongoing strike by auto workers are dimming the outlook for the rest of 2023.Inflation also remains elevated and tight labour market conditions continue to prevail, with the number of Americans filing new claims for unemployment benefits rising slightly last week, the reports showed yesterday.Some economists believe the economy’s resilience combined with high inflation could give the Federal Reserve ammunition to raise interest rates again in November. Others, however, expect the darkening cloud over the economy would discourage the US central bank from tightening monetary policy further."The big news is not that nothing has changed, but that the economy remains resilient, inflation remains elevated and the Fed’s worst-case scenario, stagflation, has been avoided for now,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina. "Given how much the Fed has raised rates, it’s impressive that the economy is still growing at this pace.”Gross domestic product increased at an unrevised 2.1% annualised rate last quarter, the government said in its third estimate of GDP for the April-June period. That was in line with economists’ expectations. A downgrade to growth in consumer spending to a lacklustre 0.8% rate from the previously reported 1.7% pace was offset by a sharp upward revision to business investment in factories amid a push by the Biden administration to bring semiconductor manufacturing back to the US.Households spent less on utilities and motor vehicle maintenance and repairs as well as on furnishings and long-lasting household equipment, clothing and footwear than previously estimated.Growth for the first quarter was raised to a 2.2% rate from the previously reported 2.0% pace. The economy is expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8%. Since March 2022, the US central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.The government also revised GDP data from 2017. The economic picture was little changed from 2017 to 2022, with GDP growing at an average annual rate of 2.2%, up from the previously estimated 2.1% pace. The revisions also showed the economy performing much better when measured from the income side than previously reported. Some economists had seized on the gap between GDP and gross domestic income to argue that the economy was not as strong as the data suggested. Americans still have more savings accumulated during the Covid-19 pandemic than previously thought and corporate profits were also revised up."Overall it now looks like there is more ‘excess saving’ currently left over for consumers than we had seen before the latest revisions, which is a favourable sign for the economy,” said Daniel Silver, an economist at JPMorgan in New York. "Upward revisions to recent data on corporate profits also are a favourable sign with respect to the durability of the expansion.” Growth estimates for the July-September quarter are currently as high as a 4.9% rate.Bitter infighting among Republicans in the US House of Representatives over spending, however, could lead to a government shutdown, sapping momentum in the fourth quarter.Hundreds of thousands of federal workers will be furloughed and a wide range of services, from financial oversight to medical research, will be suspended if Congress does not provide funding for the new fiscal year that starts on October 1.Goldman Sachs estimated that the shutdown would reduce fourth-quarter GDP growth by two-tenths of a percentage point for each week it lasts, though the per-week effect would depend on the duration of the shutdown.