The federal government has announced that last quarter’s gross domestic product (GDP) was lower than initially calculated.
- The Bureau of Economic Analysis reported last month that annualized growth for the second quarter was 2.4% but revised it on Wednesday to show the real number is closer to 2.1%.
- Downgrades in inventory investment and business spending cut against economists’ expectations that the GDP would not be revised this quarter, with moderate investments outweighing consumer spending.
- Revised statistics show inventory investment declined by $1.8 billion rather than growing by $9.3 billion, while household spending increased to 1.7%. Gross domestic income rose 0.5% after two quarters of contraction.
- The current GDP rate is still considered strong relative to the Federal Reserve’s expected non-inflationary rate growth of 1.8%.
- The economy grew by 2% in the first quarter, and some economists predict a bullish 5.9% growth rate for the third quarter.
Why It’s Important
Wednesday’s modest adjustment is not earthshattering in its implications, but it does have implications for economic expectations going into the late part of the year—particularly for how the Federal Reserve will respond with its rate hikes. Economic growth is still resilient in spite of the pressures against the economy. Inflation remains high at 3.2%, and job growth has slowed in recent weeks.
From the perspective of the Fed, Wednesday’s announcement may be a welcome sign of change. The Fed has raised interest rates by 5.25% since March 2022 in a desperate attempt to uproot entrenched inflation, which peaked at 9.1% in June 2022. Aggressive interest rate hikes have reduced inflation, but the final goal of reducing inflation to 2% is proving tricky. The Fed wants to see the economy cooling off as a side effect that interest rates are having the desired effect.
As we previously reported, a similar correction in June revealed that large portions of Europe have been under a recession for the past several months as GDP flatlined.
“But what I did find interesting is that we did get the first release of real gross domestic income which is an alternative way of measuring output… that came in at just half a percent. [It] suggested that growth was a fair bit weaker, and that sort of continues a trend and divergence that’s occurred over the last four quarters… it suggests to us that potentially the economy isn’t as strong as the headline real GDP numbers are suggesting,” Macquarie Group economist David Doyle tells Yahoo Finance Live.
“The details of the report continue to point to an economy with positive underlying momentum and that demonstrated resilience in the face of elevated interest rates, tighter credit conditions, and a weak global backdrop,” EY-Parthenon economist Lydia Boussour tells Reuters.