US economy sees unexpected 2.8% growth in second quarter as inflation slows

The U.S. economy grew faster than expected in the second quarter, but inflation subsided, leaving intact expectations of a September interest rate cut from Fed.

The US economy grew faster than expected in the second quarter, but inflation subsided, leaving intact expectations of a September interest rate cut from the Federal Reserve.

In the US, the Gross domestic product increased at a 2.8% annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said in its advance estimate of second-quarter GDP on Thursday. (AFP)

Gross domestic product increased at a 2.8% annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said in its advance estimate of second-quarter GDP on Thursday. Economists polled by Reuters had forecast GDP rising at a 2.0% rate. Estimates ranged from a 1.1% rate to a 3.4% pace. The economy grew at a 1.4% rate in the first quarter.

U.S. central bank officials regard a 1.8% pace as the non-inflationary growth rate.

The economy, which continues to outperform its global peers despite hefty rate hikes from the Fed in 2022 and 2023, remains supported by a resilient labor market even as the unemployment rate has risen to a 2-1/2-year high of 4.1%.

The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased at a 2.9% rate after surging at a 3.7% pace in the first quarter, welcome news for U.S. central bank officials ahead of their two-day policy meeting next week.

The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for the past year. It has hiked its policy rate by 525 basis points since 2022. Financial markets expect three rate cuts this year, starting in September.

Despite the solid economic growth pace, the outlook for the second half of the year is hazy. The labor market is slowing, which will impact wage gains.

The saving rate is well below its pre-pandemic average and economists estimate that the bulk of the Fed's rate hikes is still to be felt. State and local government revenues are also slowing, which could erode spending.

There are also worries about new tariffs, which could see businesses front-loading imports if former President Donald Trump is returned to the White House in November's presidential election.

Nonetheless, a recession is not expected, with monetary policy easing anticipated this year.