Surprisingly strong GDP report undermines economic slowdown narrative
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U.S. GDP growth this spring was stronger than previously thought, new revisions released Thursday morning show.
Why it matters: It is the latest piece of data to undermine the narrative that a broad-based slowdown is underway, amid a confusing set of crosscurrents buffeting economic data.
- It also led traders to lower their bets on aggressive Federal Reserve interest rate cuts ahead.
Driving the news: In the April-through-June quarter, GDP rose at a 3.8% annual rate, not the 3.3% most recently estimated — the highest since the fall of 2023. (The first estimate showed the economy grew at 3%.)
- Even better, the positive revision was driven not by volatile categories like inventories and trade flows, which don't tend to convey much information about underlying demand.
- Rather, it was fueled by an upward revision to consumer spending.
By the numbers: Final sales to private domestic purchasers, which economists view as a good indicator of underlying trend growth in the economy, was revised up a full percentage point, to a 2.9% annual rate in Q2.
- For the first half, it was up at about a 2.4% annual rate, far healthier than earlier estimates.
State of play: The stronger-than-expected GDP data comes alongside reassuring labor market data.
- Jobless claims came in at 218,000, roughly 14,000 fewer than the previous week — a continued reversal of the upward surge seen in recent weeks.
Between the lines: A collapse in payroll job growth over the last few months has sparked worries about a broader slowdown underway.
- But it's always been an open question how much of that is because of immigration policy restricting the supply of workers, and how much a dearth of demand.
- Thursday's data is evidence for the issue being on the supply side.
- The odds of two more interest rate cuts this year fell to 65%, from 73%, per CME's Fedwatch tool based on futures prices.
What they're saying: "If excessively restrictive rates were pushing the economy toward recession, you would think that the cyclical and interest rate sensitive parts of the economy would be showing that canary in the coal mine style — and they do not seem to be for the most part," Chicago Fed president Austan Goolsbee told reporters Thursday morning.
- "The fact that you saw some greater strength in the numbers this morning, I don't think that yet changes my basic view of the throughline of steady growth," Goolsbee said.
Of note: Some of the blockbuster headline GDP growth in the second quarter was a result of trade whiplash.
- Companies rushed to import goods in the first quarter to get ahead of President Trump's tariffs. At that time, it held down economic growth, with GDP contracting by 0.6% in the first three months of the year.
