The Bureau of Economic Analysis (BEA) has released its second estimate for the second quarter of 2023, indicating that real gross domestic product (GDP) grew at an annual rate of 2.1%. This growth follows a 2% increase observed in the first quarter.
However, it’s noteworthy that this second estimate of 2% GDP growth is a dip from the initial estimate of 2.4% provided by the BEA back in July.
This recent increase in GDP can be primarily attributed to robust consumer spending, nonresidential fixed investment, and government spending at various levels, including state, local, and federal. Nevertheless, these positive contributions were somewhat mitigated by declines in exports, residential fixed investment, and private inventory investment. Additionally, there was a decrease in imports, which are subtracted from GDP calculations.
The surge in GDP was paralleled by a notable increase in workers’ personal income, as reported by the BEA. During the second quarter, personal income saw a substantial rise of $232.1 billion. This increase was primarily fueled by compensation and gains from assets, including interest and dividends.
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The question looming is whether the Federal Reserve will opt to raise interest rates once again in September, despite the second estimate from the Bureau of Economic Analysis (BEA) indicating a drop in GDP growth for the second quarter. Notwithstanding this, indicators of sustained economic growth and robust consumer spending are influencing the Fed’s decision-making process.
Up to this point, the Federal Reserve has implemented 11 interest rate hikes since 2022 as part of its strategy to curb inflation and bring it into alignment with the target range of 2%. During the Fed’s most recent meeting in July, a widely expected rate hike of 25 basis points was delivered.
Fed Chairman Jerome Powell underscored this decision, citing the current GDP data and highlighting strong spending and overall economic robustness. He expressed the Fed’s confidence in raising interest rates, saying, “We’re looking at the current data in GDP, and we’re seeing strong spending. We’re seeing a strong economy, and it’s made us confident that we can go ahead and raise interest rates.”
Furthermore, several Fed officials have conveyed their stance on the possibility of additional interest rate hikes. Fed Governor Michelle W. Bowman, during an event with the Kansas Bankers Association in Colorado earlier in the month, stated, “Additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2% target.” She emphasized her monitoring of consistent evidence of inflation aligning with the 2% goal, as well as vigilance for signs of a slowdown in consumer spending and labor market conditions loosening.
Notably, despite efforts to combat inflation, it increased to 3.2% in July, providing further motivation for the Fed to consider additional interest rate hikes this year.
Morning Consult Chief Economist John Leer commented on the situation, saying, “The longer inflation remains elevated, the more entrenched it becomes.” He emphasized that the key question revolves around the Fed’s tolerance for core inflation above 4%, suggesting that it is likely quite low, making rate cuts an improbable prospect for the remainder of the year.
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