The Economy Grew More Than Expected Again. Now What?

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Upside Surprise

The U.S. economy grew more than expected between April and June, easily beating expectations and raising new questions about its bifurcated state.

Gross domestic product, the broadest measure of economic activity, grew at an annualized pace of 2.8% last quarter. This was more than the roughly 2% analysts had expected, or the 1.4% pace from the first quarter.

What Changed?

The surprise reading was mainly due to growing consumer spending and business inventories, but remained weighed down by declining residential real estate investments and higher imports. 

To be sure, the economy today is still not as strong as it was in the back half of 2023. Retail sales were flat last month, and business activity is stagnating across nearly half of the 12 Federal Reserve districts, per the Fed’s July Beige Book. And with a Philadelphia Fed report showing credit card delinquency rates at a record high, consumer spending could contract in the coming months. 

These data points alone are telling us something interesting: Consumer spending is robust and growing, but credit card delinquencies are up too. To many consumers, the economy may not feel as strong as it is because years of rising costs of living have put their household finances in a choke hold. It’s a reminder that this moment in the American economy very much isn’t feeling the same to everyone. And for policy makers this may make it harder to make decisions.

What Next?

This was just the first estimate of second quarter GDP growth, and the Commerce Department will publish a few additional estimates down the line because there are a lot of components going into such an all-encompassing data point.

For the moment, the GDP print is giving the Federal Reserve some additional breathing room. The central bank is expected to cut interest rates sooner rather than later as it unwinds the tight monetary policy it put in place to combat high inflation. The Fed has been watching for weakening economic indicators to pinpoint when to start easing its policy. And this GDP read, really wasn’t weaker at all.

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