Real GDP expanded by a solid 2.4% quarter-over-quarter (q/q, annualized) in the second quarter of 2023. The reading came in notably above the consensus forecast, which called for a modest gain of 1.8% q/q.
Consumer spending grew by 1.6% – decelerating from 4.2% recorded in Q1. Spending on services (+2.1%) accounted for most of the gains, while durable (+0.4%) and non-durable (+0.9%) expenditures also ticked up.
Business investment jumped 7.7% q/q, as capital outlays on equipment (+10.8%) and intellectual property products (+3.9%) both rebounded. In addition, investments in structures continued to see robust strength (+9.7%).
Residential investment (-4.1%) continued to decline in Q2, despite a modest turnaround in residential construction, as sales of new and existing homes continued to struggle under higher mortgage rates.
Government spending increased 2.6% q/q, as spending at both the federal (+0.9%) and state & local (+3.6%) level moved higher. Federal expenditure growth moderated as nondefense spending declined, while defense spending continued to grow.
Exports fell by 10.8% in the second quarter, while imports recorded a more modest decline of 7.8%. This left the trade deficit roughly unchanged from Q1.
Inventory investment ticked up slightly in the second quarter – adding 0.1 percentage points to headline growth.
The core PCE deflator rose 3.8% on a q/q (annualized) basis – decelerating from 4.9% in Q1.
Key Implications
The U.S. economy expanded for a fourth consecutive quarter in 2023Q2, marking a full year of growth since the brief slowdown at the start of 2022. The resilience in consumer spending – which makes up roughly two thirds of GDP – has kept the economy growing solidly during the first half of the year. With the labor market remaining strong, consumers have been able to weather the headwinds of higher prices and higher interest rates so far.
This was shown in domestic demand in the second quarter, with steady consumer spending on services being joined by modest growth in durable and non-durable expenditures. Business investment also jumped up in the second quarter as equipment purchases rose notably and investment in structures remained elevated. Measures of consumer and business sentiment have stabilized in recent months as near-term growth prospects have improved, although future expectations remain relatively pessimistic.
With the Federal Reserve’s most recent hike yesterday, the policy rate now sits at its highest level in 22 years. Progress has been made on the inflation front, however the Federal Reserve will need more time to decide whether the trajectory is pointing to a sustainable return to its 2% target. The cumulative effects of the 525bps in rate hikes have not yet fully filtered through the economy and are expected to continue to weigh on economic growth through the second half of this year.
