2nd Quarter GDP Exceeds Expectations, But Fed’s Rate Hike to 22-Year High Threatens Future Economic Growth

Craig Bannister | July 27, 2023
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The latest data from the Bureau of Economic Analysis reported Thursday that real Gross Domestic Product (GDP) in the United States increased at an annual rate of 2.4 percent in the second quarter of 2023. This exceeds expectations and betters the 2.0% growth observed in the first quarter.

These figures are subject to revisions, and a more complete and comprehensive estimate will be released at a later date.

The news comes a day after the Federal Reserve raised its benchmark short-term interest rate for the 11the time in the past 17 months – to the highest level in 22 years – making it harder for consumers to finance purchases, such as homes and vehicles.

Announcing the Fed’s move, which boosted its key interest rate from 5.1% to 5.3%, Fed Chair Jerome Powell was noncommittal about the prospect of future rate hikes.

The increase in real GDP can be attributed to several factors, including consumer spending, nonresidential fixed investment, state and local government spending, private inventory investment, and federal government spending. These gains were partially offset by decreases in exports and residential fixed investment. This indicates a buoyant economy with a diverse range of sectors contributing to its growth.

Consumer spending saw a notable increase in both goods and services. Leading contributors to this surge were housing and utilities, healthcare, financial services and insurance, and transportation services. On the goods front, recreational goods and vehicles as well as gasoline and other energy goods played a significant role.

Nonresidential fixed investment experienced a noticeable uptick as well, driven by increases in equipment, structures, and intellectual property products. This suggests that businesses are investing in their operations and expanding their capabilities, which is a positive sign for economic expansion.

State and local government spending also saw an increase, particularly in compensation of government employees and investment in structures.

Private inventory investment demonstrated growth in both farm and nonfarm inventories, but there remain areas of concern. Exports experienced a downturn, which could be indicative of global economic challenges or trade restrictions. Additionally, there were decelerations in rates of growth of consumer spending, federal government spending, and state and local government spending, which might require monitoring and potential policy adjustments to ensure sustained economic growth.

Thursday’s report prompted analysts predicting an impending recession to push back, not eliminate, the date of their expected economic retraction.

The business and economic reporting of CNSNews.com is funded in part with a gift made in memory of Dr. Keith C. Wold.