Looking for a working definition of resilience? Take a look at the American economy, which expanded at a 2.4% seasonally adjusted annualized rate in the second quarter (2.6% on a year-ago basis). Driving that growth was a durable American household, which boosted consumption by 1.6% between March and June.
Growth during the first half of the year averaged 2.2%, which is slightly above the long-term trend rate of 1.8%. The American economy continues to defy expectations, and with productivity-enhancing investments in infrastructure, manufacturing and the environment in the pipeline, one should not discount the underlying resilience of this economy.
Alternative metrics of growth arrived in line with the top-line number. Real final sales expanded at a 2.3% pace. Our preferred metrics of growth, real final sales to private domestic purchasers and disposable personal spending, increased by 2.3% and 2.5%, respectively..
If one was looking for evidence of a soft landing, this report is about as good as it gets.
Still, we expect slower growth during the second half of the year as higher rates raise the cost of doing business, demand slows for commercial and industrial loans, consumer finance costs increase and household savings diminish.
Policy implications
With the Federal Reserve now in a patient and resolute mode, there is little impetus for the central bank to cut rates to bolster overall economic activity.
Read more perspectives on economic headwinds facing the middle market.
But the manufacturing construction boom, which is providing a tailwind to growth through legislation like the CHIPS and Science Act and the Infrastructure Investment and Jobs Act, will most likely be bolstered over the next few years as this spending accelerates.
Despite what we expect to be slower growth in the second half of the year because of the lagged impact of 525 basis points of rate hikes since March of last year, productivity-enhancing manufacturing and infrastructure investment will provide a modest offset to that drag on growth.
For those interested in a longer forward look at public policy-driven investments in infrastructure, manufacturing and the environment, we expect that the peak of this activity will occur in late 2025 and early 2026.
The data
Economic growth in the second quarter was driven primarily by household consumption. Demand for services expanded at a 2.1% rate while outlays on goods increased at a modest 0.7% pace, durable purchases increased by 0.4% and nondurables by 0.9%.
Gross private investment advanced by 5.7%, fixed investment by 4.9% and nonresidential investment by 7.7%. Outlays on structures increased by 9.7%, equipment by 10.8% and intellectual property by 3.9%.
Investments in software, equipment and intellectual property have a profound effect on raising productivity and bode well for the economy. This is perhaps the most encouraging aspect of the report.
Exports declined by 10.8% because of slower global demand for goods. Imports contracted by 7.8% as de-risking from China resulted in an 8% decline in goods imports.
Government consumption increased by 2.6% which was fueled by a 2.5% increase in national defense spending and a 3.6% increase in state and local government outlays. Non-defense spending declined by 1.1%.
Inventory accumulation increased by $9.3 billion in the second quarter, providing a modest 0.14% boost to growth.
The takeaway
Rock solid growth underscored the American economy during the first half of the year as a resilient household continued to defy expectations.
Our preferred metric of growth implies a 2.7% average pace of growth during the first half of the year, which is in line with the 2.6% top-line average. The American consumer continues to be the foundation of the current expansion while public sector-financed growth in manufacturing construction provided a tailwind to fixed investment.
We are bullish on the direction of investment in infrastructure, manufacturing and the environment, and anticipate the current tidal wave of investment to crest in late 2025 or early 2026.
