Biden/Trump Debate: Cut Taxes, National Debt
President Biden and former President Trump are facing each other over the economy.
The economy picked up sharply in the second quarter as increases in consumer and business spending offset a decline in home construction and a widening trade gap.
The nation’s gross domestic product, the value of all goods and services produced in the United States, expanded at a seasonally adjusted annual rate of 2.8% in the April-June period, the Commerce Department said Thursday. That’s up from a 1.4% increase earlier this year and a 2.5% increase through 2023.
Forecasters polled by Bloomberg had predicted a 1.9% increase.
Is the economy doing well now?
The economy has remained surprisingly resilient despite high interest rates and inflation over the past two years, resulting in strong job and wage gains that have kept spending up for consumers.
But cracks are beginning to appear as higher borrowing costs take a bigger toll on households and firms.
Is US consumer spending increasing or decreasing?
In the second quarter, consumer spending rose 2.3% annually, up from the 1.5% pace earlier this year, but below 3% in the second half of 2023. Consumption accounts for 70% of economic activity.
To fuel their purchases, Americans are spending more of their paychecks, saving about 3.8% of their monthly income, compared to the 7% or less they averaged before the pandemic. As a result, they don’t have much cushion. Low- and middle-income households have drastically reduced their Covid-19-related savings. Credit card debt is high and historically high.
Check it out: How much does the average household spend on groceries per month?
According to a survey by Wolters Kluwer Blue Chip Economic Indicators, the economy is forecast to grow by less than 2% year-on-year in the second half of the year.
„As consumers tighten their wallets and businesses become more reluctant to invest and hire, we should get cooler GDP reports from here,” said Countrywide economist Oren Klachkin.
When can we expect the central bank to cut interest rates?
Many economists are urging the Federal Reserve to cut its key interest rate — a 23-year high of 5.3% — soon to fight inflation. The risk of them acting too late and allowing the U.S. to slide into recession begins to outweigh the risks of moving too soon and fueling inflation, down from 9.1% to 3% in 2022. Most forecasters expect the Fed to start. It cut its benchmark rate in September.
A solid 2.8% increase in output in the second quarter will make the central bank think twice about cutting rates in the near term. That could „slightly disappoint” investors who had hoped the central bank would consider a surprise rate cut at a meeting next week.
But the best forecasters expect the central bank to make a move in two months.
„The recent easing of labor market conditions and signs of slower price growth make a strong case for further easing,” Stephen Brown, economist at Capital Economics, wrote in a note to clients at the central bank’s September meeting.
How other sectors of the economy performed:
Industrial investments will accelerate
Business investment grew 5.2% after rising 4.4% in the previous quarter.
Spending on computers, delivery trucks, factory machinery and other equipment rose 11.6%, despite higher interest rates, which pushed up the cost of borrowing. Many companies have purchased labor-saving technology to address labor shortages that continue to plague some industries.
Expenditure on buildings, oil wells and other structures decreased by 3.3%.
Business stocks are rebounding
Businesses replenished their inventories more briskly in the previous quarter, adding nearly a percentage point to growth.
Such stocks are volatile and generally do not reflect the underlying health of the economy. Companies are stockpiling more in 2021 in response to supply chain snarls and product shortages, which have led to big swings in the past two years.
Government expenditure will increase
Government spending rose 3.1% from 1.8% in the previous quarter. A flurry of state and local procurement, infrastructure and clean energy projects has been spurred by federal legislation.
Economists still expect a slowdown in state and local spending, as a slowing economy freezes tax revenue and the federal government cuts pandemic-related aid.
Trade partially offsets GDP gains
Trade was a drag on growth as imports outnumbered exports.
Imports rose 6.9% as Americans continued to buy foreign-made goods. Due to economic weakness overseas and a strong dollar, US exports are only 2% more expensive to buyers overseas.
That large trade gap slowed GDP growth.
Slows down housing growth
Home construction and renovations fell 1.4% after three quarters of gains.
As there was a severe shortage of houses in the market, the construction of houses was going on at a rapid pace. Many homeowners don’t sell because they don’t want to get a higher mortgage rate on their new home.
But recently, single-family home starts have softened as higher mortgage rates have spurred construction.