U.S. economic activity was much stronger than expected during the second quarter, thanks to strong consumer spending, government spending and a large build in inventories, according to preliminary estimates released Thursday by the Commerce Department.
Real gross domestic product, a measure of all goods and services produced between April and June, rose at a 2.8% annual rate when adjusted for seasonally and inflation. Economists polled by Dow Jones had forecast growth of 2.1% after a 1.4% gain in the first quarter.
Consumer spending helped push the growth figure higher, as did contributions from private inventory investment and nonresidential fixed investment, according to the first of three estimates the department will provide.
Personal consumption expenditures, the Bureau of Economic Analysis’ leading indicator of consumer activity, rose 2.3% during the quarter, compared with a 1.5% acceleration in the first quarter. Both spending on services and goods saw strong increases during the quarter.
Inventories also contributed significantly, adding 0.82 percentage points to the overall gain. Government spending also added a strong boost, rising 3.9% at the federal level, including a 5.2% increase in defense spending.
On the downside, imports, which subtract from GDP, rose 6.9%, the largest quarterly increase since the first quarter of 2022. Exports rose just 2%.
Stock market futures rose after the report while Treasury yields fell.
“The growth combination was among the best we’ve seen in some time,” said Joseph Brusuelas, chief economist at RSM. The report tends to support the idea that the U.S. economy is now in a productivity boom, which should raise living standards across the country in the medium term through low inflation, low employment and rising real wages.
There was some good news on the inflation front: The personal consumption expenditures price index, a key measure of the Fed’s core inflation, rose 2.6% during the quarter, down from a 3.4% gain in the first quarter. Excluding food and energy, core PCE prices, which the Fed focuses on more as a longer-term indicator of inflation, rose 2.9%, compared with a 3.7% gain in the prior period.
The so-called chain-weighted price index, which takes into account changes in consumer behavior, rose 2.3% during the quarter, below estimates of 2.6%.
The GDP report “confirms the path we are on toward steady growth and low inflation,” U.S. Treasury Secretary Janet Yellen said in remarks Thursday morning in Rio de Janeiro.
Another key variable, final sales to private domestic buyers, which the Federal Reserve considers a good indicator of underlying demand, accelerated to 2.6%, the same pace as the previous quarter.
However, the report also noted that the personal saving rate continues to slow, at 3.5% for the quarter, compared to 3.8% in the first quarter.
There have recently been signs of cracks in the consumer image.
Credit card delinquencies have hit an all-time high, according to data going back to 2012, a report released Wednesday by the Federal Reserve Bank of Philadelphia showed. Revolving credit balances also hit a new high even as banks announced tighter credit standards and reduced new card issuances.
However, retail sales figures continued to rise, suggesting that consumers are able to weather the headwinds of higher interest rates and persistent inflation.
There are also pressures in the housing market: sales are declining while home prices continue to rise, putting pressure on first-time home buyers.
Fed officials are expected to hold interest rates steady when they meet next week, though market pricing is pointing to the first rate cut in four years in September. Policymakers have been cautious about when they might start cutting rates, though recent comments have suggested a greater willingness to begin easing monetary policy, and most central bankers have said they see further increases as unlikely.
In other economic news on Thursday, the Labor Department reported that initial jobless claims were 235,000 for the week ended July 20, down 10,000 from the previous week and in line with Dow Jones forecasts. Continuing claims, which lagged a week, fell slightly to 1.85 million.
Orders for durable goods — generally large items such as aircraft, appliances and computers — unexpectedly fell 6.6% in June, compared with expectations for a 0.3% increase. However, excluding transportation, new orders increased 0.5%.
