The American economy showed robust growth in the second quarter of the year, expanding at a healthy 3% annual pace, according to the latest report from the Commerce Department. This growth was primarily driven by strong consumer spending and solid business investment.
Consumer spending, a key driver of economic activity, increased at a 2.8% pace last quarter, slightly lower than the previous estimate of 2.9%. Business investment also saw a significant uptick, growing at an 8.3% annual pace, with a notable rise in equipment investment at 9.8%.
Inflation continued to ease, hovering just above the Federal Reserve's 2% target. The personal consumption expenditures index (PCE), the central bank's preferred inflation gauge, rose at a 2.5% annual rate in the second quarter, down from 3% in the previous quarter. Core PCE inflation, excluding volatile food and energy prices, grew at a 2.8% pace.
Despite facing 11 interest rate hikes by the Fed in 2022 and 2023 to combat high inflation, the U.S. economy demonstrated resilience. Annual inflation, as measured by the consumer price index, dropped to 2.5% from a peak of 9.1% in mid-2022.
While the economy continued to grow and employers maintained hiring momentum, recent months have seen a slowdown in job market activity. Employers added an average of 116,000 jobs per month from June to August, the lowest three-month average since mid-2020. The unemployment rate rose from 3.4% to 4.2%.
In response to declining inflation and signs of a weakening job market, the Fed made an unprecedented half-point interest rate cut, the first in over four years. The move aimed to bolster job growth as inflation pressures eased.
Despite these challenges, various economic indicators remain positive. Consumer spending at retailers increased, industrial production rebounded, and single-family home construction accelerated. Consumer sentiment also improved for the third consecutive month, driven by more favorable prices for durable goods.
The report also revised GDP estimates from 2018 to 2023, showing higher growth rates, averaging 2.3% annually. The revised data indicated a 2.9% GDP growth rate last year, up from the previously reported 2.5%.
The government's final estimate for GDP growth in the April-June quarter sets the stage for the upcoming release of the July-September GDP growth figures on Oct. 30. Forecasts suggest the economy may have expanded at a 2.9% annual pace in the third quarter.
