What recession? Latest GDP data shows economy is holding firm

Economic growth accelerated in the second quarter of the year, adding to evidence that the U.S. may avoid a recession even as interest rates rise to a two-decade high.

The nation’s economic output grew at a 2.4% annual rate in the three months ending in June, the Commerce Department reported on Thursday. That shows the economy is gaining speed, rising from 2% in the January-March quarter, not decelerating as many economists had predicted only a few months ago. 

Consumer spending slowed to a 1.6% annual rate, from 4.2% in the first quarter of the year, a likely consequence of higher borrowing costs. But business investment and state and local government spending grew faster.

“This is a strong report, confirming that this economy continues to largely shrug off the Fed’s aggressive rate increases and tightening credit conditions,” Olu Sonola, head of U.S. economics at the Fitch Group, said in an email. “The bottom line is that the U.S. economy is still growing above trend, and the Fed will be wondering if they need to do more to slow this economy.”

Indeed, economists with the central bank no longer expect a recession this year, Fed Chair Jerome Powell revealed Wednesday. In April, the Fed’s staff had predicted a “mild” recession later in 2023. At a press conference, Powell noted that the economy has proved resilient despite Fed hikes and that the job market “remains very tight.” 

“We will be able to achieve inflation moving down to our target without the significant kind of downturn that results in high levels of job losses,” he said. “That’s been my view, that’s still my view.”

Earlier this month, Goldman Sachs lowered the odds of a recession this year to just 20%. The International Monetary Fund also upgraded its assessment of U.S. economic growth this year to 1.8%, from 1.6% earlier this year. 

Steady job growth

Hiring has slowed since last year, but employers still added a solid 209,000 jobs in June. The nation’s unemployment rate is 3.6% — the same level as when the Fed started raising interest rates in March of 2022. The share of working-age people with a job hit a new high last month. 

“General labor market resilience, as indicated by initial claims for unemployment easing over the last few weeks, moderating inflation and gently slowing final demand growth offer hope of an economic soft landing,” Gregory Daco, chief economist at EY, said in a report.

Inflation, which peaked last summer, has slowed to a 3% annual rate, and for the first time in two years Americans’ paychecks are growing faster than prices. 

—With reporting by the Associated Press.