U.S. economy shows strong 2.8 percent growth, driven by consumers and businesses

WASHINGTON (AP) — The nation’s economy accelerated last quarter at a strong 2.8 percent annual pace, with consumers and businesses helping drive growth despite the pressure of continually high interest rates.

Thursday’s report from the Commerce Department said the gross domestic product — the economy’s total output of goods and services — picked up in the April-June quarter after growing at a 1.4 percent pace in the January-March period. Economists had expected a weaker 1.9 percent annual pace of growth.

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Helping boost last quarter’s expansion was consumer spending, the heart of the U.S. economy. It rose at a 2.3 percent annual rate in the April-June quarter, up from a 1.5 percent pace in the January-March period. Spending on goods, such as cars and appliances, increased at a 2.5 percent rate after falling at a 2.3 percent pace in the first three months of the year.

Business investment was up last quarter, led by a 11.6 percent annual increase in equipment investment. Growth also picked up because businesses increased their inventories. On the other hand, a surge in imports, which are subtracted from GDP, shaved about 0.9 percentage point from the April-June growth.

Despite last quarter’s uptick, the U.S. economy, the world’s largest, has cooled in the face of the highest borrowing rates in decades, engineered by the Federal Reserve to fight high inflation. From mid-2022 through 2023, annualized GDP growth had topped 2 percent for six straight quarters. In last year’s final two quarters, GDP expanded by robust rates of 4.9 percent and 3.4 percent.

Fed officials have made clear that with inflation edging toward their 2 percent target level, they’re prepared to start cutting interest rates soon, something they’re widely expected to do in September.

“This is a perfect report for the Fed,” Olu Sonola, head of economic research at Fitch Ratings, said of Thursday’s GDP numbers. “Growth during the first half of the year is not too hot, inflation continues to cool and the elusive soft landing scenario looks within reach.”

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The state of the economy has seized Americans’ attention as the presidential campaign has intensified. Though inflation has slowed sharply, to 3 percent from 9.1 percent in 2022, prices remain well above their pre-pandemic levels.

This year’s economic slowdown reflects, in large part, the much higher borrowing rates for home and auto loans, credit cards and many business loans resulting from the Fed’s aggressive series of interest rate hikes.

The Fed’s rate hikes — 11 of them in 2022 and 2023 — were a response to the flare-up in inflation that began in the spring of 2021 as the economy rebounded with unexpected speed from the COVID-19 recession, causing severe supply shortages. Russia’s invasion of Ukraine in February 2022 made things worse by inflating prices for the energy and grains the world depends on. Prices spiked across the country and the world.

Economists had long predicted that the higher borrowing costs would tip the United States into recession. Yet the economy kept chugging along. Consumers, whose spending accounts for roughly 70 percent of GDP, kept buying things, emboldened by a strong job market and savings they had built up during the COVID-19 lockdowns.

The slowdown at the start of this year was caused largely by two factors, each of which can vary sharply from quarter to quarter: A surge in imports and a drop in business inventories. Neither trend revealed much about the economy’s underlying health.