The U.S. economy is on the verge of an extremely rare achievement: a “soft landing,” where inflation returns to the Federal Reserve’s target without triggering a recession. This remarkable performance was underscored by robust economic growth in the first half of the year. According to fresh figures from the Commerce Department, the economy expanded at an impressive 2.8% annualized rate in the second quarter, adjusted for inflation and seasonal variations.
The Dow Jones Industrial Average reflected investor confidence, rising 340 points, or 0.9%, after an earlier surge of over 500 points. Similarly, the S&P 500 gained 0.5%, and the Nasdaq Composite added 0.4%. These gains came after both indices experienced their worst days since 2022 just the previous day.
The strong GDP report surprised economists, showing that businesses continue to invest and consumers remain willing to spend. Consumer spending is a crucial component, accounting for about two-thirds of U.S. economic output. As the economy grew from April through June, inflation resumed its downward trend, moving closer to the Federal Reserve’s 2% target.
This economic resilience points to a potential soft landing, an achievement only previously seen in the 1990s. The GDP report also highlighted a key gauge of consumer demand, which rose to an annual rate of 2.9% in the second quarter, matching the rate of the fourth quarter of 2023, the strongest pace in two years. Business investment also showed signs of strength during this period.
The current economic health indicates that the Federal Reserve, under Chair Jerome Powell, has managed inflation effectively so far. The Fed’s readiness to begin cutting interest rates suggests confidence in their control over inflation. The economy’s strength is a positive sign for the Biden administration, which has managed to avoid a recession despite the Fed’s aggressive interest rate hikes aimed at curbing inflation. Last year, the resilience of U.S. consumers defied economists’ widespread predictions of an economic downturn.
President Joe Biden, in a statement, highlighted the U.S. economy’s strength, asserting, “Today’s GDP report makes clear we now have the strongest economy in the world.” He emphasized the administration’s commitment to fighting for America’s future, filled with promise and opportunities.
However, despite the broader economic robustness, many Americans still feel the pinch of inflation. Home prices remain high, and mortgage rates are elevated, making home ownership challenging. Additionally, the job market, which boomed post-pandemic, has started to normalize, making job hunting tougher.
The Federal Reserve’s upcoming meeting next week will be crucial as officials are expected to hold interest rates steady. This meeting will provide an opportunity for the Fed to assess their confidence in controlling inflation. Fed Governor Christopher Waller recently stated that current data supports the potential for a soft landing, indicating the possibility of rate cuts in the near future.
Wall Street traders largely believe that the Fed will cut rates in the September 17-18 meeting. While Fed Chair Jerome Powell has not explicitly signaled rate cuts, he has hinted at the possibility, especially if unemployment rises unexpectedly. Powell has emphasized that controlling inflation is not the only concern, pointing out the recent cooling of the labor market.
David Russell, global head of market strategy at TradeStation, commented on the economic outlook, saying, “Prices are easing and growth is strong. We had some worries about slowing GDP last June but those haven’t panned out. The second half could be in good shape for the bulls. Goldilocks is getting stronger and the risk of stagflation is fading. There’s not much stag and not much ‘flation.”
The current trajectory of the U.S. economy suggests that it is well-positioned for continued growth and stability, making the rare achievement of a soft landing increasingly plausible.