Jul 25, 2024,04:37pm EDT

Real GDP grew at 2.8% rate in Q2 2024 – DR. BILL CONERLY USING DATA FROM THE BUREAU OF ECONOMIC ANALYSISModerate economic growth usually doesn’t justify celebration, but given last year’s pessimism, it’s time for fireworks and sparklers. Gross domestic product last quarter increased by 2.8%, a hair above average long-term growth. (The quarter-to-quarter change was annualized.) But economists surveyed by the surveyed by the  in late 2022 and most of 2023 estimated the risk of recession to exceed 50%. The Federal Reserve may have pulled off a soft landing in their fight against inflation, and the outlook appears far rosier than it did a year ago.The current cycle appears rare in that inflation had been high and rising when the Fed began tightening. Inflation has fallen dramatically, and now no recession appears likely. That latest Wall Street Journal survey puts the risk of recession over the next 12 months at just 28%.Soft landings are usually considered rare, but some economists see them more frequently. Alan Blinder’s review finds a soft landing in 1965-66 as the Fed raised short-term interest rates without precipitating a recession. Inflation had not exceeded four percent, however, so not much tightening was needed, less than two percentage points of increase in interest rates. The Fed pushed interest rates up in 1983-84 without triggering a recession. Inflation had already dropped sharply, so the Fed did not have to persist with higher rates for too long. In the Greenspan soft landing (1993-95), the Fed raised interest rates sharply even though inflation had been low. GDP growth, however, had been excessive, which led the Fed to tighten. Then economic growth calmed.But a soft landing is indeed rare if high inflation was brought down, and that’s what we are looking at, so far at least.Economic growth last quarter was propelled by business equipment investment, probably part of the semiconductor and data center building boom. Nonresidential construction had surged in past quarters thanks to the CHIPS Act and the AI boom requiring data centers. Now it’s time to put gear inside the buildings. Government spending also boosted GDP more than usual. Consumer spending was right in line with long-term trends, up 2.3%. Inventories grew more than in the past two quarters. Residential construction and foreign trade lagged a bit.This GDP report will give the Federal Reserve impetus to cut interest rates, though probably not as soon as their end-of-July meeting. The latest report is not weak, but the Fed believes that its current interest rate policy will slow the economy with a time lag. Bringing economic growth down below its long-run trend does not make sense. However, inflation is still running above the Fed’s two percent target. The interest rate decision will take into account estimates of the time lags of monetary policy’s effect on both real economic activity and inflation. Look for rate cuts starting in September.The outlook for economic growth has become more favorable. Though some people and businesses have cut back their spending, the overall economy continues at a solid pace. Employment has probably increased in part by greater immigration, including asylum seekers. Some of them cannot legally work but do anyway. The numbers are not precise, but probably add up to a good chunk of recent growth.More By This Author:Economic Forecast Impacts Of The 2024 Presidential ElectionBusiness Cost Inflation: Labor Expenses Will Drive 2024-2025 BudgetsInternational Trade Sagging On De-Globalization, Reshoring