WASHINGTON (AP) 鈥� The nation鈥檚 economy accelerated last quarter at a strong 2.8% annual pace, with consumers and businesses helping drive growth despite the pressure of continually high interest rates.
Thursday鈥檚 report from the Commerce Department said the gross domestic product 鈥� the economy鈥檚 total output of goods and services 鈥� picked up in the April-June quarter after growing at a 1.4% pace in the January-March period. Economists had expected a weaker 1.9% annual pace of growth.
The GDP report also showed that inflation continues to ease, while still remaining above the Federal Reserve鈥檚 2% target. The central bank鈥檚 favored inflation gauge rose at a 2.6% annual rate last quarter, down from 3.4% in the first quarter of the year. Excluding volatile food and energy prices, so-called core PCE inflation increased at a 2.9% pace. That was down from 3.7% from January through March.
The latest figures should reinforce confidence that the U.S. economy is on the verge of achieving a rare 鈥渟oft landing,鈥� whereby high interest rates, engineered by the Fed, tame inflation without tipping the economy into a recession.
Helping boost last quarter's expansion was consumer spending, the heart of the U.S. economy. It rose at a 2.3% annual rate in the April-June quarter, up from a 1.5% pace in the January-March period. Spending on goods, such as cars and appliances, increased at a 2.5% rate after falling at a 2.3% pace in the first three months of the year.
Business investment was up last quarter, led by a 11.6% 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.
Fed officials have made clear that with inflation edging toward their 2% target level, they鈥檙e prepared to start cutting interest rates soon, something they鈥檙e widely expected to do in September.
鈥淭he Fed will be reassured鈥欌�� by Thursday's GDP report, said Bill Adams, chief economist at Comerica Bank. 鈥淲ith inflation trending lower ... the Fed thinks that it鈥檚 getting close to the time to cut interest rates.鈥欌��
Rate reductions by the Fed would, over time, reduce consumers鈥� borrowing costs for things like mortgages, auto loans and credit cards.
The state of the economy has seized Americans鈥� attention as the presidential campaign has intensified. Though inflation has slowed sharply, from 9.1% in 2022, prices remain well above their pre-pandemic levels.
This year鈥檚 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鈥檚 aggressive series of interest rate hikes.
The Fed鈥檚 rate hikes 鈥� 11 of them in 2022 and 2023 鈥� 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鈥檚 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% 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鈥檚 underlying health.
Paul Wiseman, The Associated Press
