June 17, 2024

Second quarter GDP benchmark to show steady economic growth

The U.S. economy is likely to have notched another solid quarter of growth, powered by brisk government and consumer spending, and defying long-held fears that the country would have slipped into recession by now.

New gross domestic product figures, to be released Thursday at 8:30 a.m. Eastern time by the Bureau of Economic Analysis, are expected to show that the economy expanded by an annual rate of 1.8 percent between April and June, marking the fourth straight quarter of growth, according to economists polled by Bloomberg.

The economy’s resilience, bolstered by a healthy job market, has surprised even the most optimistic economists. It has also forced the Federal Reserve to extend its aggressive fight against inflation with another interest rate hike on Wednesday, pushing borrowing costs to a new 22-year high. Fed staff, who a few months ago had worried about a “mild” recession, are no longer forecasting an imminent downturn.

“The economy has remarkably avoided a recession,” said Diane Swonk, chief economist at KPMG. “That’s put the Fed in a nice position; it’s emboldened them to really go all-in against inflation. But the question is: How long can this strength persist? Are there still effects from higher interest rates that we haven’t seen yet?”

Fed raises rates again as it weighs how much further to go

There are growing signs that the Fed’s tightening is beginning to work its way through the economy: The housing market has slowed sharply in the past year, manufacturing is down, and employers are posting fewer jobs. Households, which until recently had been splurging on travel and big-ticket items, are also becoming more cautious with their money.

Consumer spending, which grew 4.2 percent at the beginning of the year, is expected to have increased by just 1 percent in the most recent quarter, according to the Atlanta Fed’s GDPNow tracker.

“Consumers are still spending — they’re not retrenching, by any means — but they are being more careful,” said Gregory Daco, chief economist at EY-Parthenon. “That slowdown is only going to continue as people spend down their extra savings and start paying their student loans again.”

People are spending less on hotels, flights and restaurants

But the emerging trepidation among consumers is largely being offset by a burst of new spending by the government and businesses. The Biden administration’s robust investment in infrastructure projects, for example, including new bridges and roads, airport improvements and manufacturing plants for electric vehicles, appear to be boosting the overall economy far earlier than many had predicted.

Morgan Stanley last week made a “sizable upward revision” to its GDP expectations for the year — raising its annual forecast threefold, from 0.4 percent to 1.3 percent — citing ongoing federal investments.

“The economy in the first half of the year is growing much stronger than we had anticipated,” Ellen Zentner, chief U.S. economist for Morgan Stanley, wrote in a research note last week. “The Infrastructure Investment and Jobs Act … is driving a boom in large-scale infrastructure.”

The Biden administration has so far allocated $225 billion in infrastructure funding toward 35,000 projects across the United States. Private companies have announced another $503 billion in related investments, White House data shows.

Infrastructure spending: Six projects helping to remake the country

In Beaverton, Ore., Tina Adams’s engineering firm expects a 25 percent increase in revenue this year, which she attributes flurry of new government-backed infrastructure projects. She has added three new engineers to her workforce of 10 to keep up, and she says the boom in federal work has more than made up for stalling local projects.

“I can say with a straight face that of 25 contracts and projects we have, almost all of those — 23 of them — are federally funded in some way,” said Adams, founder of Casso Consulting. “These are short-term jobs, but they have very long-lasting effects. We are looking down the barrel of a whole lot more work opportunities.”

Adams’s firm, which specializes in public works designs, is among the first to benefit from the burst of federal funding. She and her staff of engineers are already laying out drainage routes and utility moves for a number of large-scale projects: replacing bridges, widening highways, creating bike lanes and adding wheelchair ramps to sidewalks.

Biden says he’s reshaping the economy. Economists say it’s too early to tell.

“It’s already had a direct impact and created an environment where we could hire more people and work on more projects,” Adams said. “But this is just the first step. There’s a whole lot more coming down the pipeline.”

Rachel Siegel contributed to this report.

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