Households spent less on utilities and motor vehicle maintenance and repairs as well as on furnishings and long-lasting household equipment, clothing and footwear than previously estimated. — Reuters pic
WASHINGTON, Sept 29 — The US economy maintained a fairly solid pace of growth in the second quarter and activity appears to have accelerated this quarter, but a looming government shutdown and an ongoing strike by auto workers are dimming the outlook for the rest of 2023.
Inflation also remains elevated and tight labour market conditions continue to prevail, with the number of Americans filing new claims for unemployment benefits rising slightly last week, the reports showed on Thursday.
Some economists believe the economy’s resilience combined with high inflation could give the Federal Reserve ammunition to raise interest rates again in November. Others, however, expect the darkening cloud over the economy would discourage the US central bank from tightening monetary policy further.
“The big news is not that nothing has changed, but that the economy remains resilient, inflation remains elevated and the Fed’s worst-case scenario, stagflation, has been avoided for now,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina. “Given how much the Fed has raised rates, it’s impressive that the economy is still growing at this pace.”
Gross domestic product increased at an unrevised 2.1 per cent annualised rate last quarter, the government said in its third estimate of GDP for the April-June period. That was in line with economists’ expectations. A downgrade to growth in consumer spending to a lacklustre 0.8 per cent rate from the previously reported 1.7 per cent pace was offset by a sharp upward revision to business investment in factories amid a push by the Biden administration to bring semiconductor manufacturing back to the United States.
Households spent less on utilities and motor vehicle maintenance and repairs as well as on furnishings and long-lasting household equipment, clothing and footwear than previously estimated.
Growth for the first quarter was raised to a 2.2 per cent rate from the previously reported 2.0 per cent pace. The economy is expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8 per cent. Since March 2022, the US central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25 per cent-5.50 per cent range.
The government also revised GDP data from 2017. The economic picture was little changed from 2017 to 2022, with GDP growing at an average annual rate of 2.2 per cent, up from the previously estimated 2.1 per cent pace.
The revisions also showed the economy performing much better when measured from the income side than previously reported. Some economists had seized on the gap between GDP and gross domestic income to argue that the economy was not as strong as the data suggested. Americans still have more savings accumulated during the Covid-19 pandemic than previously thought and corporate profits were also revised up.
“Overall it now looks like there is more ‘excess saving’ currently left over for consumers than we had seen before the latest revisions, which is a favourable sign for the economy,” said Daniel Silver, an economist at JPMorgan in New York. “Upward revisions to recent data on corporate profits also are a favourable sign with respect to the durability of the expansion.”
Growth estimates for the July-September quarter are currently as high as a 4.9 per cent rate.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury yields were mixed.
Strong labour market
Bitter infighting among Republicans in the US House of Representatives over spending, however, could lead to a government shutdown, sapping momentum in the fourth quarter.
Hundreds of thousands of federal workers will be furloughed and a wide range of services, from financial oversight to medical research, will be suspended if Congress does not provide funding for the new fiscal year that starts on October 1.
Goldman Sachs estimated that the shutdown would reduce fourth-quarter GDP growth by two-tenths of a percentage point for each week it lasts, though the per-week effect would depend on the duration of the shutdown.
“Regardless of duration, federal employee furloughs should subtract 0.15 percentage point for each week of shutdown,” Goldman Sachs economist Alec Phillips wrote in a note. “We have estimated the indirect private sector hit at 0.05 percentage point per week, but this is likely to be smaller in a short shutdown, and larger in a protracted shutdown lasting many weeks.”
Added to the impact of the shutdown is the United Auto Workers union strike against General Motors, Stellantis and Ford Motor, which is seen depressing motor vehicle production and raising automobile prices at a time when inflation is persistently higher. The personal consumption expenditures price index (PCE) excluding food and energy advanced at an unchanged 3.7 per cent rate in the second quarter.
The strike, now in its second week, is already having ripple effects on supply chains.
Beyond the anticipated temporary hits from the shutdown and auto strike, the labour market is expected to remain tight for some time. A second report from the Labor Department on Thursday showed initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 204,000 for the week ended September 23. Economists had forecast 215,000 claims for the latest week.
Claims have this month stayed in the lower end of their 194,000-265,000 range for 2023. The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 12,000 to a still-low 1.670 million during the week ending September 16, the claims report showed.
The so-called continuing claims covered the period during which the government surveyed households for September’s unemployment rate. Continuing claims dipped between the August and September survey weeks. The unemployment rate increased to 3.8 per cent in August from 3.5 per cent in July.
“The job market is in good shape,” said Bill Adams, chief economist at Comerica in Dallas. “The unemployment rate’s increase in August is unlikely to be a warning of the economy weakening.” — Reuters
