US economy grows less than expected in Q2, inflation cools

WASHINGTON: The US economy grew at a slightly less brisk pace than initially thought in the second quarter as businesses liquidated inventory, but momentum appears to have picked up early this quarter as a tight labor market underpins consumer spending.

The report from the Commerce Department on Wednesday also confirmed that inflation pressures moderated last quarter. The economy continues to expand despite 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022.

"The downgrade to second-quarter GDP growth will be welcomed by Fed officials and reinforces our expectations for a policy pause in September but the door will remain open to further tightening," said Lydia Boussour, a senior economist at EY-Parthenon in New York.

"Data point to steady economic momentum into the second half of the year and confirm that a recession isn't on the near-term horizon."

Gross domestic product increased at a 2.1 percent annualized rate last quarter, the government said in its second estimate of GDP for the April-June period. That was revised down from the 2.4 percent pace reported last month

Inventory investment was sharply revised down to show it declining at a $1.8 billion pace instead of increasing at the previously reported $9.3 billion rate. Inventories were a small drag to GDP growth rather than adding 0.14 percentage point as estimated last month.

There were also downward revisions to business spending on equipment and intellectual products. These offset a slight upgrade to consumer spending, which accounts for more than two-thirds of U.S. economic activity. Trade subtracted more from GDP growth than initially estimated.

The economy grew at a 2.0 percent pace in the first quarter. It is expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8 percent.

The economy's resilience raises the risk of borrowing costs remaining higher for a while, but slowing inflation is fueling optimism that the U.S. central bank is probably done hiking rates and could engineer a "soft landing." Most economists have walked back their forecasts for a recession this year.