In the second quarter, U.S. real GDP exceeded expectations and grew by 2.8%. One of its biggest drivers was personal spending, which has been robust. Even as households become budget conscious, increasingly abandoning brands and hunting for bargains, they continue to spend.
Nevertheless, growth is moderating from its strong showing last year. Inflation is slowly returning to target. The job market is quickly rebalancing. Meanwhile the unemployment rate has risen for three straight months and is now over 4%.
U.S. Federal Reserve Chairman Jerome Powell is particularly attentive to labor market dynamics. Pre-COVID, when he shifted the Fed from being model driven to data dependent, he highlighted that past reliance on models and overly precise inflation targets may have prematurely hurt job growth, particularly for those at lower income levels.
For now, most data point to an economy that is slowing at a measured pace. To deliver a soft landing, rates will also need to start normalizing. A rate cut in September still seems likely.
Sources: Bloomberg, Financial Times, 2024.