Gross Domestic Product data for the second quarter came out on Thursday. Economists expected a moderate slowdown in growth, given inflation and interest rates. Instead, the reading shows a robust economy. The original forecast was something around 2%, give or take a few tenths of a percent. What we got instead was 2.8%. That’s double the GDP growth in the first quarter of the year. The big categories? Vehicles, recreational goods and services and furniture, along with some more essential ones like health care and housing.
And yes, GDP is impacted by business investments and trade. But what really drives GDP, especially the acceleration this month, is consumers. Consumers that are, according to the Federal Reserve, struggling to pay off their credit cards. Consumers that are, according to stores like Target and Walmart, focusing more on essentials. And consumers that are, according to both formal surveys and less formal dinner table talk, downright grumpy.
Yet, they keep spending.
When you look at this GDP report from different distances, you see different things. Take the broad 50,000-foot view and the economic picture — and how consumers live in it — looks blurry.
“The economy continues to outperform expectations and it’s been really hard, frankly, to kind of get a firm handle on what’s going on in the economy overall,” said Oren Klachkin, an economist at Nationwide.
Comforting takeaway, I know. But Klachkin said it’s actually not so surprising that consumers aren’t behaving the way we think they should. If we zoom way in from 50,000 feet to, say, 50 feet, things look a lot different.
“We’re still, in many ways, in the aftermath of the pandemic and at least from an economic data perspective that’s certainly the case,” Klachkin said.
If the value of your home or investments went up, you have a cushion. Meanwhile, if you’re a low-income renter, inflation is probably still hitting you pretty hard.
“There could be a story here of two different types of American consumers: those who have assets who have net worth and those who have sort of lived from month to month,” said Camelia Kuhnen, a professor who researches household finances at University of North Carolina at Chapel Hill.
And Kuhnen said unless something dramatic happens in the labor market, homeowners may continue to spend.
“And I think it’s because people are like, ‘Ok, that’s how much a car costs,'” she said.
In other words, consumers may be starting to accept that these prices are here to stay.
Francesco Bianchi, an economist at Johns Hopkins University, argued maybe when we look at this GDP report, we need to take a middle view — like from 500 feet.
“Sometimes it’s hard to see if you just look quarter by quarter. But when you look at the trend, an average over a couple of quarters, you see that it’s trending down,” he said.
That 2.8% increase? That’s still less growth than right before the Fed started hiking interest rates. Which is what the Fed is going for.
