The US economy is on the brink of achieving an extraordinary feat. With solid growth and inflation trending down, the nation is inching closer to what economists term a “soft landing”—a scenario where inflation returns to the Federal Reserve’s target without triggering a recession. This has only happened once before, in the 1990s.
According to the latest Commerce Department figures, the economy grew at a robust 2.8% annualised rate in the second quarter, surpassing economists’ predictions. Resilient consumer spending and continued business investment drive this strong performance, highlighting the economy’s enduring strength. Consumer spending, which accounts for about two-thirds of US economic output, picked up at an annual rate of 2.9%, matching the strongest pace in two years.
The stock market initially surged on the news of the economy’s resilience but later lost momentum. The Dow rose by 81 points, or 0.2%, after an early jump of over 500 points. Meanwhile, the S&P 500 fell by 0.5%, and the Nasdaq Composite dropped by 0.9%. This mixed performance comes after both indices recorded their worst day since 2022 earlier in the week.
As the economy expanded from April through June, inflation resumed its downward trend, moving closer to the Federal Reserve’s 2% target. The Fed’s aggressive interest rate hikes, which have reached a 23-year high since last July, have not prevented this. People view the Fed’s ability to manage inflation while maintaining economic growth as a significant success.
Fed officials are expected to hold interest rates steady in their upcoming meeting. There are indications that rate cuts may be on the horizon if inflation continues to ease and unemployment remains stable. Fed Chair Jerome Powell has hinted at potential rate cuts, noting that unexpected rises in unemployment would prompt action from the central bank.
The robust economic performance is a boon for the Biden administration. Despite the Fed’s rate hikes, the economy has avoided a recession, defying earlier predictions of an economic downturn. President Joe Biden hailed the GDP report, emphasising the strength of the US economy and pledging to continue fighting for America’s future.
Despite the positive economic indicators, Americans still face challenges. Inflation remains a concern, and the housing market continues to be a pain point with record-high home prices and elevated mortgage rates. The job market, though strong, is showing signs of normalisation, making it harder for individuals to find new employment opportunities.
As the Fed prepares to meet next week, all eyes will be on their monetary policy decisions. The consensus among Wall Street traders is that the Fed will cut rates in its September meeting. The Fed’s actions and economic data in the coming months will be crucial in determining whether the US can achieve a rare and highly sought-after soft landing.
In conclusion, the US economy’s resilience and the potential for a soft landing mark a significant achievement. With inflation easing and growth strong, the second half of the year could be promising for both the economy and the stock market. As we continue to monitor these developments, the outlook remains cautiously optimistic.
