The US economy is showing strong signs of resilience and growth, as the country’s gross domestic product (GDP) for the second quarter of 2023 exceeded expectations. This positive economic performance is likely to further support the Federal Reserve’s decision to raise interest rates this year.
According to the Bureau of Economic Analysis (BEA), real GDP increased at an annual rate of 2.4% from April to June, surpassing the projected 1.8% growth. This growth was driven by various factors, including consumer spending, nonresidential fixed investment, state and local government spending, private inventory investment, and federal government spending. However, the impact of decreased exports and residential fixed investment partially offset the growth.
The strong consumer spending indicates that the economy has remained resilient despite concerns over inflation and rising prices, which prompted the Federal Reserve to raise interest rates 11 times since 2022. The Federal funds rate currently stands at a targeted range of 5.25% to 5.5%, the highest level in 22 years. The National Association of Federally-Insured Credit Unions (NAFCU) believes that this moderate pace of growth demonstrates that the economy has enough momentum to weather the effects of rising interest rates and inflation.
While a recession seemed like a possibility for the US economy in the second half of 2023, the better-than-expected GDP figures indicate that the country is moving further away from that potential scenario. NOAH YOSIF, NAFCU’s economist, mentioned that a soft-landing is still possible but timing is crucial in balancing the drawdown in the tightening cycle to minimize the constrictive effects on economic growth.
Inflation, as measured by the personal consumption expenditures (PCE) deflator, eased to 2.6%, aligning with the Federal Reserve’s 2% target. This positive development is seen as a promising sign; however, core inflation, which excludes energy prices, has been slower to drop towards the desired 2% target. This suggests the possibility of future rate hikes to control inflationary pressures.
The housing market, on the other hand, continues to be a challenging sector due to higher prices and interest rates constraining demand. Mortgage rates have remained between 6% to 7%, and with the Federal Reserve’s restrictive monetary policy persisting, it is unlikely that these rates will decline. Consequently, the supply of homes has decreased as homeowners, who are locked into lower mortgage rates, choose to stay in their existing homes. The number of existing home listings has dropped by 35%, exacerbating the supply shortage.
While new home construction is expected to increase in the coming quarters, the weakness in the existing home market, which is larger, continues to hinder overall growth in the housing sector. Mike Fratantoni, the chief economist of the Mortgage Bankers Association, expressed this concern.
The positive GDP figures for the second quarter of 2023 not only provide further evidence of the US economy’s resilience but also support the Federal Reserve’s decision to continue raising interest rates. As inflation eases closer to the desired target, future rate hikes may be necessary to maintain price stability. The housing market, however, remains a challenge due to higher prices and mortgage rates, limiting housing supply and impacting overall growth in the sector.
