The economic recovery in the United States gained momentum in the spring, as high consumer spending and a resurgence in business investment helped keep recession at bay once again.
The inflation-adjusted gross domestic product increased at an annual rate of 2.4% in the second quarter, according to the Commerce Department. This was above the growth rate of 2% in the first three months of the year and much stronger than analysts had expected a few months ago.
Consumers are the main drivers of growth. Spending increased at a rate 1.6% slower than in the first quarter, but still solidly. Much of this growth came from spending on services, as consumers shelled out good amounts on vacation travel, dining out, and tickets for Taylor Swift.
However, business investment rebounded in the second quarter after a decline in the first three months of the year, and increased spending by state and local governments also contributed to growth.
The persistence of the economy surprised economists. Many thought that high inflation—and the Federal Reserve’s efforts to eliminate it through aggressive interest rate hikes—would lead to a recession, or at least a clear slowdown in the first half of the year. For a time, it seemed they would be right: tech companies were laying off tens of thousands of workers, the housing market was in deep crisis, and a series of bank failures raised fears of a financial crisis.
But instead, layoffs were confined to a few sectors, the banking crisis did not spread, and even the housing market began to stabilize. The labor market remained strong, giving Americans money to spend: personal income, after taxes and adjusted for inflation, increased at a rate of 2.5% in the second quarter.
Highest Interest Rates in 22 Years
After more than 2 years constrained by the Covid-19 pandemic, people want to spend more. But a heated economy means more interest rate hikes.
On Wednesday (26), the Federal Reserve (Fed) raised interest rates again. Eleven times in 17 months. The Fed’s aggressive campaign aims to bring down inflation. And it may be working. Based on the latest reading, inflation measured by the Consumer Price Index grew only 3% in June. And the Fed’s preferred inflation measure—the core Personal Consumption Expenditures Index—fell to 4.6% in its latest reading.
In both cases, the numbers are still above the Fed’s 2% target, suggesting that the U.S. central bank may not have finished its journey of rate hikes yet.
With a quarter-point increase to a target of 5.25% to 5.5%, it is the highest interest rate since early 2001.
What Does This Mean for Consumers?
• Savings opportunities are very good—finally managed to take that summer trip? Now think about saving a little. There are several short-term CD options paying between 4% and 5%.
• Credit cards are very expensive—On July 19, the average credit card interest rate was 20.44%, slightly down from 20.58% recorded the previous week, according to Bankrate.com. Even so, it is still over 6 percentage points higher than the average recorded at the beginning of last year.
• The cost of financing a home is still high—The average rate for a 30-year mortgage was 6.78% in the week ending July 20, down from 6.96% the previous week, according to Freddie Mac. Even so, it is still well above the 5.54% recorded a year ago.
Source: The New York Times and CNN