US Q2 GDP Growth Doubles to 2.8% — Evening Brief – 07.25.24

U.S. economic growth came in at a much stronger-than-expected 2.8% in the second quarter, double the final reading of 1.4% in the first quarter, according to the advance estimate released by the U.S. Bureau of Economic Analysis on Wednesday. U.S. real GDP also came in more than two standard deviations above than the consensus forecast of 2.0%

The stronger-than-expected reading in the first quarter brings first-half GDP to approximately 2.1%, a notch down from the 3.1% pace in 2023. The second-quarter growth was driven mostly by increases in consumer spending, private inventory investment, and nonresidential fixed investment. Imports, which are a drag on GDP, increased.

The data indicates very robust growth, according to UBS. Investment increased 8.4% quarter on quarter, the highest level since the third quarter of 2023. AI-related investment appears to have aided growth, as information processing equipment increased by 10.2%. Personal consumption increased by 2.5%, outpacing the 2.3% fall in the first quarter. Government spending increased 3.1%, compared to 1.8% in the first quarter.

Meanwhile, the Federal Reserve’s key inflation gauge, the Core PCE index, came in slightly hotter-than-expected in the second quarter, at 2.9% year on year, versus 3.7%, but higher than the 2.7% consensus. We also see that headline gross domestic purchases prices climbed 2.3% in the second quarter, falling short of the 2.6% projection, after rising 3.4% in the first quarter.

The underlying elements were not especially troubling. Core goods prices increased by 0.6% on an annualized basis, following a 0.5% decline in the first quarter. Health-care inflation fell to 2.4% from 3.8%. Housing inflation may have slowed less than projected, to 5% from 5.7%. Portfolio management services fees, which typically track the S&P 500, increased at an 18% annualized pace.

Following the data release, markets priced in a 7% chance of a quarter-point rate cut at next week’s FOMC meeting, down from 9% before the news. The markets have fully priced in a quarter-point interest rate cut at the September 18 meeting, with 12% odds of a 50-basis point cut, down from 20%. The likelihood of three quarter-point rate cuts by the end of the year has dropped to 63% from 69%.

“Economic growth is solid, not too hot and not too cold,” Christopher Rupkey, chief economist at FWDBONDS, told Reuters. “Inflation looks to be going the Fed’s way and an easing of monetary restraint with an interest rate cut is likely in September.”