The Economy Was Healthier in the Second Quarter Than Previously Thought

It turns out the economy was doing better in the second quarter than government data previously showed.

The Gross Domestic Product, a measure of the nation’s overall economic output, grew at a 3% annual rate in the second quarter after being adjusted for inflation, the Bureau of Economic Analysis said Thursday, revising its previous estimate of a 2.8% growth rate. The revision, based on new data, increased mainly because of upward revisions to figures for consumer spending—the most important driver of economic growth. 

Thursday’s revision was the first of two scheduled amendments to preliminary data first reported in July. Forecasters had expected the GDP figure to remain unchanged at 2.8%, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. 

Inflation Fell, But Household Budgets Are Stressed

The burst of spending came at the expense of consumers’ bottom lines, however, with the personal saving rate falling 0.2 percentage points to 3.3%. 

In addition to more robust economic growth, the report showed inflation was tamer than previously thought, with price increases as measured by Personal Consumption Expenditures advancing at a 2.5% annual rate, down from 2.6% in the previous estimate. 

On Friday, the bureau will release its July spending, income, and inflation figures, which will inform policymakers at the Federal Reserve as they prepare to cut the central bank’s benchmark interest rate in September. The Fed is preparing to trim the Fed funds rate in September after holding it at a two-decade high for more than a year in an effort to slow the economy and stifle inflation.

Economy On Course For Soft Landing

The Fed aims to keep rates high enough to push inflation down to a 2% annual rate but not so high that they crush economic growth and the job market. Steady economic growth coupled with cooling inflation would signal that the Fed has successfully balanced its two major priorities and brought the economy in for a “soft landing” from the post-pandemic surge of inflation that set in starting in late 2021.

Thursday’s report suggested that a soft landing is still in the cards, as opposed to the recession that has typically followed in past historical episodes when the Fed has hiked interest rates, Scott Hoyt, an economist at Moody’s Analytics, wrote in a commentary. 

“Economic growth will drop below trend, but the baseline outlook holds that slow growth will bring inflation close to the Fed’s target without precipitating a recession,” he said. “Interest rate cuts seem certain to begin in September.”