The U.S. economy grew faster than expected in the second quarter as a resilient labour market supported consumer spending, while businesses boosted investment in equipment and built more factories, potentially keeping a much-feared recession at bay.
Despite the broad-based acceleration in growth reported by the Commerce Department on Thursday, inflation subsided considerably last quarter, with one of the key measures tracked by the Federal Reserve for its 2-per-cent target posting its slowest increase in more than two years.
Economists, some of whom have been forecasting a recession since 2022, believed the U.S. central bank’s fastest interest-rate hiking cycle since the 1980s was drawing to a close, though strong domestic demand could see it keeping borrowing costs higher and for longer.
The Fed on Wednesday raised its policy rate by 25 basis points to the 5.25-per-cent to 5.50-per-cent range.
“Despite the Fed’s campaign to slow growth and snuff out inflation, no recession is in sight,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “Stop raising rates for now.”
Gross domestic product increased at a 2.4-per-cent annualized rate last quarter, the government said in its advance estimate of second-quarter GDP. The economy grew at a 2.0-per-cent pace in the January-March quarter. Economists polled by Reuters had forecast GDP would rise at a 1.8-per-cent rate in the April-June period.
The government’s measure of inflation in the economy, the price index for gross domestic purchases, rose at a 1.9-per-cent rate, the slowest in three years. This followed a 3.8-per-cent pace of increase in the first quarter.
Even more encouraging, the personal consumption expenditures price index (PCE), excluding food and energy, advanced at a 3.8-per-cent rate. That was the smallest gain since the first quarter of 2021 and was a slowdown from the 4.9-per-cent pace logged in the January-March quarter. The Fed watches the PCE price indexes for monetary policy.
“It may be too soon to talk about Goldilocks, but there have been some favourable supply-side developments lately that could have legs,” said Michael Feroli, chief U.S. economist at JPMorgan in New York.
Outside housing and manufacturing, the economy has largely weathered the 525 basis points in rate hikes from the Fed since March, 2022. Most economists are now confident the “soft landing” scenario – in which inflation falls, unemployment remains relatively low and a recession is avoided – is feasible.
President Joe Biden said the GDP report was evidence his economic plan was working. “We’re just getting started,” the Democratic president said in a statement.
Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 1.6-per-cent pace in the second quarter. Though the pace slowed from the first quarter’s robust 4.2-per-cent rate, it was enough to add more than a full percentage point to GDP growth.
Households stepped up purchases of recreational goods and vehicles, but cut back on automobiles and clothing. They spent more on services such as housing and utilities, airline travel as well as motor vehicle maintenance and repair services.
There were also increases in spending on financial services, mostly portfolio and investment advice and insurance.
Spending is being propped up by excess savings accumulated during the COVID-19 pandemic and debt. While job growth has cooled from last year’s rapid pace, wage gains remain strong.
Income at the disposal of households after adjusting for inflation rose at a 2.5-per-cent rate after surging at an 8.5-per-cent pace in the first quarter. The saving rate rose to 4.4 per cent from 4.3 per cent.
Labour market tightness persisted early in the third quarter as companies hoard workers after struggling to find labour during the pandemic.
A separate report from the Labour Department showed initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 221,000 for the week ended July 22, the lowest level since February. Economists had forecast 235,000 claims for the latest week.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, dropped 59,000 to 1.690 million during the week ending July 15, the lowest level since January. The historically low so-called continuing claims suggest some laid-off workers are quickly finding employment.
The continuing claims data covered the week the government surveyed households for July’s unemployment rate.
Continuing claims fell between the June and July survey periods. This together with a Conference Board survey on Tuesday showing consumers upbeat about the labour market in July suggests the unemployment rate likely eased this month. At 3.6 per cent in June, the jobless rate was not too far from multi-decade lows.
Last quarter, business investment accelerated after almost stalling in the January-March period as spending on equipment rebounded after two straight quarterly declines.
There were increases in outlays on equipment such as aircraft, trucks, buses and truck trailers.
Efforts by the Biden administration to bring semiconductor manufacturing back to the United States are boosting factory construction. Investment in non-residential structures such as factories remained robust last quarter.
“The need to address supply shortages across the economy has supported robust construction activity, prevented a severe manufacturing pullback and helped price and wage pressures ease,” said Gregory Daco, chief economist at EY-Parthenon in New York.
Government spending added to growth. Inventory investment provided a small lift, but trade was a drag after contributing to growth for four straight quarters.
Residential investment, which includes home building, contracted for the ninth straight quarter.
A measure of domestic demand increased at a 2.3-per-cent rate after surging at a 3.2-per-cent pace in the first quarter.
But headwinds remain. Wage growth is slowing as the employment gains cool. Higher borrowing costs could eventually make it harder for consumers, especially low-income households, to fund spending with debt. Banks are tightening credit and excess savings continue to be run down.
“We still expect the economy to slow and enter a mild recession at the turn of the year,” said Daniel Vernazza, chief international economist at UniCredit in London.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
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