The Fed Will be Closely Watching the Data as It Weighs When to Start Cutting Interest Rates
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Key takeaways
Economists expect gross domestic product grew at an annualized rate of 1.9% in the second quarter, which is higher than the previous quarter but down from the second half of last year.Consumer spending continues to prop up economic growth, despite economists’ projections that retail sales will sputter out.Officials at the Federal Reserve are closely watching economic indicators as they weigh when to start cutting interest rates, amid growing market expectations that the central bank will ease policy soon.
Despite signs of a slowdown in recent weeks, economic growth likely remained stable through the end of the second quarter.
Economists surveyed by Dow Jones Newswires and The Wall Street Journal anticipate gross domestic product (GDP) grew to an annualized 1.9% in the second quarter. The closely watched data will be released from the Bureau of Economic Analysis on Thursday.
If estimates hold true, that would be higher than the first quarter but still subdued from the second half of last year.
“It would also be consistent with an economy expanding at a pace modestly below its estimated potential and consistent with the disinflation observed in the first half of 2024,” wrote Moody’s Analytics Economist Matt Colyar.
Economic activity has moderated and inflation has declined as the Federal Reserve has kept its benchmark lending rate at a 23-year high for the past year. Expectations have grown that the Fed will soon start cutting the fed funds rate, but officials at the central bank say they are watching economic data for more evidence that inflation is clearly headed toward the Fed’s 2% annual target.
What Fueled Growth in the Second Quarter?
A few corners of the economy are giving GDP a lift.
Inventory levels, which economists say are notoriously volatile and difficult to predict, likely boosted the second quarter’s measure of economic growth. Durable goods orders, such as heavy equipment for business, also showed signs of growth during that time.
However, no sector has been as influential on the economy’s growth in the past few years as consumers’ spending—and the second quarter will be no different, economists said.
Consumers have continued to spend despite inflationary price pressures and elevated costs of borrowing—helping the economy avoid a recession that many thought would happen last year. Economists so far this year have thought consumers would falter as pandemic-era savings ran out.
Consumer Spending Remains Stalwart
However, the second quarter was better than anticipated, culminating in a surprising June report that showed little change despite economists’ expectations that spending would decline.
“Consumer spending is nowhere near a freefall,” wrote Wells Fargo economists.
Consumers still have significant trends working in their favor, said Scott Anderson, chief U.S. economist at BMO.
“Among the most important tailwinds in our view are record-high household wealth, rising real disposable income, and still historically low levels of unemployment,” Anderson wrote. “We could even see the drag of higher interest rates begin to fade over time, setting the economy up for a growth revival and a more tolerable inflation rate in 2025.”
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