Soft landing now

Economic growth picked up more than expected in the spring, as cooling inflation and a strong labor market allowed consumers to keep spending even as high interest rates weighed on their finances.

Gross domestic product, adjusted for inflation, increased at a 2.8 percent annual rate in the second quarter, the Commerce Department said on Thursday. That was faster than the 1.4 percent rate recorded in the first quarter, but shy of the unexpectedly strong growth in the second half of last year.

Consumer spending, the backbone of the U.S. economy, rose at a 2.3 percent annual rate in the second quarter — a solid pace, albeit much slower than in 2021, when businesses were reopening after pandemic-induced closings. Business investment in equipment rose at its fastest pace in more than two years. Inflation, which picked up unexpectedly at the start of the year, eased in the quarter.

The data is preliminary and will be revised at least twice.

Taken together, the findings suggest that the economy remains on track for a rare “soft landing,” in which inflation eases without triggering a recession. That is something few forecasters considered likely when the Federal Reserve began raising interest rates two years ago to combat inflation.

“It’s the perfect landing,” said Sam Coffin, an economist at Morgan Stanley.

Recession fears re-emerged in recent months, first when inflation briefly surged and then when the previously rock-solid job market showed signs of cracking in the spring. But recent data, including the surprisingly strong second-quarter growth figures, indicate that the expansion is on firm footing.

“The economy is in a transition, but it’s in a good place,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “The economy is slowing from very strong growth in the second half of last year. We’re just settling down into something that’s a little more sustainable.”

Ordinarily, the encouraging data would be good news for President Biden and his preferred successor, Vice President Kamala Harris. But polls show that voters are skeptical of the rosy economic narrative, in part because prices are substantially higher than before the pandemic even though inflation has cooled. And despite the strong growth in the second quarter, the economy has gradually lost momentum, and most forecasters expect growth to slow further in the second half of the year.

The next president , with less inflation, lower interest rates and the delayed impact of the big investments in infrastructure and green energy that Congress approved under Mr. Biden.

The second-quarter growth figures were lifted by businesses’ rebuilding inventories, a volatile component that often swings wildly from one quarter to the next. But measures of underlying demand in the economy were also strong. Businesses invested more in equipment and software, and consumers spent more on goods and services alike. Exports and imports both rose.

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Inflation, meanwhile, continued to cool. Consumer prices rose at a 2.6 percent rate, down from 3.4 percent in the first quarter and only modestly above the Fed’s long-run target of 2 percent per year.

Fed officials will meet next week to weigh when to begin lowering interest rates, which they have held at their current level, the highest in decades, for the past year. Hardly anyone expects policymakers to cut rates next week, but they could signal that such a move could come as soon as September if inflation continues to cool.

The economy as a whole has proved surprisingly resilient in the face of high interest rates. But the Fed’s policies have taken a clear toll in some areas. The housing market, in particular, has struggled as high borrowing costs have made it more expensive both to buy existing homes and to build new ones. Residential investment — a category that includes home construction and renovations — fell in the second quarter after rebounding last year.

And while overall consumer spending has remained strong, there are signs that some families —  — are struggling. More borrowers are falling behind on car loans and credit card payments, and major retailers have reported that consumers have become more cautious.

“Right now it’s a double or triple whammy,” said Dana Peterson, chief economist for the Conference Board, a business group. “Prices are high, insurance costs are high and if I want to finance anything, it’s going to be really expensive.”

Consumers have been able to keep spending because unemployment has stayed low and wages have risen faster than prices; after-tax income, adjusted for inflation, rose at a 1 percent annual rate in the second quarter. But the unemployment rate has edged up in recent months, and some economists are concerned that more businesses could begin laying off workers. That could cause ripple effects in the entire economy.

“For the consumer, it boils down to the job market,” Mr. Sweet said. “That’s why it’s critical that the job market hangs in there.”