Is The Fabled Soft Landing In Sight? GDP Report Tops Growth Expectations Despite Recession Fears

Key takeaways

• U.S. GDP grew by 2.4% in the second quarter, beating estimates and the previous quarter’s growth
• The news came a day after the Fed raised interest rates to a target range of 5.25% to 5.5%
• The Dow Jones, S&P 500 and Nasdaq all made gains as the economic picture looks increasingly bright

The U.S. economy’s growth surprised everyone this week, arriving at 2.4% for the second quarter and smashing expectations out of the water. The news came a day after the Fed raised interest rates to their highest level in decades in a bid to tackle inflation, but the economy has defied expectations time and time again.

Now, the ‘soft landing’ which is notoriously hard to achieve might be on the cards for the U.S. economy. From the Fed’s point of view, they can’t relax now; there are also too many moving pieces to predict with much accuracy what could happen next. That didn’t stop the markets from rising this week – here’s the lowdown.

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What did the latest GDP report reveal?

Gross domestic product (GDP) for the second quarter of 2023 grew at a seasonally and inflation-adjusted rate of 2.4%, which bucked analysts’ expectations of 1.5% to 2% growth and was higher than the 2% growth rate in Q1.

For the second quarter, the personal consumption expenditures price index, one of the Fed’s preferred inflation gauges, increased by 2.6%, down from a 4.1% rise in Q1. The figure was well below the Dow Jones estimate of 3.2% for the second quarter, indicating early signs that the worst of inflation is behind us.

Consumer spending increased by 1.6% for the second quarter and made up 68% of all economic activity, but the figure is down from the previous quarter, where consumer spending increased by 4.2%. Given interest rates have skyrocketed in an aggressive push to bring inflation down, consumer spending has proven resilient throughout the monetary tightening cycle.

What else is going on with the economy?

On Wednesday this week, the Fed raised interest rates by a quarter-point hike, bringing the target range to 5.25% to 5.5%. U.S. interest rates are now at the highest levels in 22 years, having risen at a pace not seen since the 1970s.

Despite this, the economy has remained resilient. One of the surprising results has been jobs being continuously added to the economy – non-farm payrolls have now grown by nearly 1.7 million this year. At the same time, the unemployment rate remains at 3.6%. The latest weekly jobless claims data for the week ending July 22 came in at 221,000, a decline of 7,000 and under the 235,000 forecasted. It’s the lowest figure since February.

The monetary tightening plan has been dramatic, not without criticism, but it has worked. The latest consumer price index data showed headline inflation at 3% for June, another sharp decline from the month before at 4%, while core inflation arrived at 4.8% – the lowest increase since 2021. Both results beat expectations, which was good news for the Fed.

The June personal consumption expenditures price index, released today, reported core PCE inflation rising 4.1% from a year ago, beating estimates of 4.2% and being the lowest annual rate in nearly two years. More job data is also on the way, with the quarterly Employment Cost Index anticipated to report that hourly labor cost to employers grew at an annual rate of 4.8% in the second quarter.

Could we have a soft landing?

A soft landing is where an economy recovers without entering a recession. There aren’t many times in history where it’s been possible, but this year’s economic downturn is looking increasingly like we’ll avoid a recession.

Business spending picking up again was another point in favor of a soft landing and increased company confidence. Non-residential fixed investments, such as commercial real estate and equipment, rose 7.7% for the second quarter.

The horizon isn’t completely free of clouds. Student loan repayments will resume for the first time since 2020 after President Trump paused them as part of the pandemic relief measures, putting further pressure on millions of Americans’ spending.

New York Fed data shows that for the first quarter of 2023, total household debt levels rose by $148 billion, or 0.9%, to hit $17.05 trillion. In short – there isn’t much runway for consumer spending anymore, which could weigh heavily on the economic recovery.

At Wednesday’s meeting, Fed chair Jerome Powell reiterated that the central bank will continue to be “data dependent” in making monetary decisions. It’s a delicate balancing act the Fed has to tread, but as long as consumer spending doesn’t crater, things are looking cautiously optimistic.

The market reaction

Better-than-expected GDP growth didn’t fill the stock market with confidence. The Dow Jones gained 0.1% at the news but closed 0.7% down, ending a 13-day winning streak for the index. The S&P 500 and the Nasdaq initially climbed on Thursday, but each ended up closing down 0.6% and 0.5%, respectively. It’s a turbulent time for the markets as earnings season causes fluctuations.

Treasury yields also shot up at the GDP growth news, with the two-year Treasury note yield hitting 4.936% while the 10-year Treasury note yield reached 4.014%. The 30-year Treasury yield saw its most significant daily jump since the start of May, soaring to 4.058% from 3.927%.

It’s worth noting that the two-year yield is still well above the 10-year yield, which creates an inverted yield curve. Statistically, this has been a solid predictor of whether or not we’ll see a recession in the next 12 months.

With further jobs and inflation data expected on Friday, the U.S. stock market futures are up ahead of Friday trading. The Dow Jones rose 0.2% early on Friday, the S&P 500 futures climbed 0.5% and the Nasdaq Futures were up 0.8%.

The bottom line

The economic picture has honestly defied all expectations at this point, with contrasting data on jobs, house prices and consumer spending flummoxing analysts and investors everywhere. The result could be that we don’t see the U.S. economy in a recession after all, but it’s still too early to tell whether we’re in the clear or not.

Though inflation is on a downward slope, the Fed warns we’re not out of the woods yet. Insulate your portfolio from inflation’s impact with Q.ai’s Inflation Protection Kit. It assembles an array of assets such as TIPS, precious metals, and commodities that tend to resist inflation.

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