US economy surges in Q2, inflation eases, rate cut anticipation grows
US economy
The US economy grew more strongly than expected in the second quarter, at a robust annualised rate of 2.8 per cent, according to figures from the Commerce Department on Thursday.
This was a long way above expectations from economists who had been suggesting a 2.0 per cent growth rate, pointing to much more resilience than otherwise thought in the face of steep interest rate hikes that the Federal Reserve has applied over the past year.
That outperformance was all the more notable given the central bank's target of 1.8 per cent noninflationary growth.
But there was a silver lining for the Fed: the cooling of inflation, as measured by the core PCE price index—a key metric that strips out volatile food and energy components.
It decelerated to a 2.9 per cent rate from the previous quarter's 3.7 per cent, getting closer to the Fed's 2 per cent target.
One economist remarked, "The economy continues to outperform its global peers despite hefty rate hikes."
Resilience has been driven by a robust labour market, even as the unemployment rate edged up to a 2-1/2 year high of 4.1 per cent.
A combination of stronger-than-anticipated growth with softer core inflation set the stage for the Fed to lower interest rates as early as September.
There are now three full interest rate cuts priced into the financial market for the remainder of the year. The central bank gathers next week for its next policy meeting.
While the near-term economic outlook looks good, there are darker signs on the horizon. Indicators in the labour market show it cooling off, which could sap the steam of wage growth.
Also, the saving rate is still below its pre-pandemic levels, while the impact of the full force of the Fed's interest rate hikes remains in the future.
Economists also refer to the possibility of new tariffs in case of the re-election of former US President Donald Trump, which would disrupt the supply chains and discourage investment.
However, recession is not expected in the near time, and generally, the on-year outlook remains optimistic and underpinned by the easing of monetary policy anticipated this year.
(With inputs from Reuters)
