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 – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
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