Commentary 2

Title of the article: US economic growth accelerated in 2nd quarter, exceeding

expectations and quieting recession fears

Source of the article:

https://abcnews.go.com/Business/us-economy-expected-grown-slowed-dispelling-r
ecession-fears/story?id=101664985

Date the article was published: 27 July 2023

Date the commentary was written: 13 October 2023

Word count: 800

Unit of the syllabus to which articles relate: Macroeconomics

Key concept being used: Change

US economic growth accelerated in 2nd quarter,

exceeding expectations and quieting recession fears

U.S. economic growth accelerated over three months ending in June, blowing past economist

expectations and tamping down concerns about a possible recession. The U.S. gross domestic

product grew by a 2.4% annualized rate to finish the first half of 2023, according to government

data released Thursday.

The results mark an advance from the 2% annualized GDP growth recorded over the previous

quarter. That growth showed a cooling from the 2.6% growth displayed in the quarter before

that. The finding of 2.4% annualized growth over the three months ending in June demonstrates

that economic growth has accelerated over that period, dispelling concern among some about a

fast-approaching recession.

The heightened growth stems from an increase in consumer and government spending, as well

as a jump in business investment in inventory, according to the Bureau of Economic Analysis,

the federal agency that releases the GDP data.

A decrease in exports and home investment detracted from the GDP growth, the agency said.

Personal income -- an overall measure of a variety of incomes such as wages and rental

payments -- grew at a slower pace than it had in the previous quarter, the data showed. The

personal saving rate, however, inched upward from the previous quarter.
Fears of a recession have cast a thundercloud over the economy for many months but

forecasters sun-kissed by falling inflation and a robust jobs market have grown optimistic about

the U.S. averting a downturn. Many observers define a recession through the shorthand metric

of two consecutive quarters of shrinking in a nation's GDP.

The GDP data released on Thursday arrives a day after the Federal Reserve raised interest

rates by 0.25%, bringing its benchmark rate to a 22-year high of between 5.25% and 5.5%.

Economists surveyed by Bloomberg, however, think the move constitutes the central bank's final

rate increase of an aggressive series that began in March 2022. For more than a year, the

Federal Reserve has aimed to roll back inflation through interest rate hikes that typically slow

the economy and slash consumer demand. The approach, however, risks tipping the economy

into a downturn.

The policy appears to have succeeded in cooling prices. Inflation has fallen significantly from a

peak last summer but remains one percentage point above the Federal Reserve's target of 2%.

Some key economic indicators, meanwhile, have sustained robust performance. A jobs report

earlier this month showed that the labor market cooled, but still grew at a solid clip in June,

adding 209,000 jobs.

"The U.S. economy has been quite resilient," Fed Chair Jerome Powell said late last month in

Sentra, Portugal, at a conference organized by the European Central Bank.

Nearly three-quarters of forecasters surveyed by the National Association for Business

Economics said that the probability of the U.S. entering a recession in the next 12 months is

50% or less, the organization announced on Monday.

On Tuesday, the International Monetary Fund released fresh projections showing an improved

outlook for the global and U.S. economy. The organization said it expects the U.S. economy to

grow 1.8% this year, a revision upward from a previous estimate released in April.

"The global economy continues to gradually recover from the pandemic and Russia's invasion of

Ukraine, but it is not yet out of the woods," Pierre-Olivier Gourinchas, IMF chief economist and

research department director, said at a press conference on Tuesday.

‘
 Commentary
Nowadays the U.S. economy has been experiencing persistently high inflation rates, The

Federal Reserve, the country's central bank, has chosen to use contractionary monetary policy

( a monetary measure to reduce government spending or the rate of monetary expansion by a

central bank) to lower inflation by reducing economic growth. This is a traditional strategy to

control high inflation by reducing the aggregate demand (expressed as the total amount of

money spent on those goods and services at a specific price level and point in time.) of the

economy, as the inflation the U.S. is experiencing looks to be demand-pull in the environment.

Particularly. Due to the Fed's choice to change the interest rates by increasing them,

business and customer borrowing has been deterred. Thus. Consumers and spending on

investments (C and I, respectively) are two of the aggregate demand components that also

decline.

Figure. 1. Effect on economic growth accelerated in 2nd quarter

 Figure 1 shows the AD curve from AD1 to AD2 shifts to the right. Moving toward the real

GDP brings it closer to the Y1. The cost of borrowing increases as changes in interest rates

increase set by Central banks. As a result, there will be less demand for bonds with lower yields,

which will drive down their price. Customers and businesses in the United States might

reconsider taking out loans for big purchases or investments in this atmosphere. This generally

lowers total demand and, presumably, lowers inflation by slowing down expenditure. Businesses

would lower their capital expenditures, while households might spend less on expensive products

like residences and automobiles. As a result of worries about loan sustainability brought on by

increased interest rates, customers may become more frugal with their expenditures. Reduced

demand for goods and services as a whole can have a detrimental effect on the growth of the

economy. As a result, the economic growth in the 2nd quarter shows a cooling effect from 2.6%

to 2.4% growth over the three months.

Figure. 2. Macroeconomics effects of raising interest rates as shown through

the Monetarist model
 On the AD-AS diagram shown in Fig.1, this emerges as a leftward shift of the AD curve

from AD1 to AD2, leading to a new macroeconomic equilibrium operating at a reduced price

level PL2 and reduced real GDP Y2. However, it doesn't seem like such a contractionary monetary

policy. Effective assessments indicate that the economy is remarkably "resilient," suggesting that

real GDP growth is still occurring and that inflation is still an issue. Contractionary monetary

policy is not having any discernible effects on inflation, despite the Fed previously having hiked

interest rates a total of eight times in a bid to contain rising inflation, such. The Fed's

demand-side policy decision may have been flawed.

Elevated interest rates are frequently linked to increased cyclical unemployment,

particularly when the hike in rates is a result of monetary policy efforts to reduce inflation and

calm an economy that has become overheated. Alternatively. the U.S. government and Fed could

simply wait for the economy to adjust in the long run. As discussed, The decrease in

unemployment due to a high inflation rate is a short-term effect. In the long term, wages are not

fixed and will adjust to changes in price level. The increase in changes in interest rates is able to

help the country's economy to achieve its target of interest rates of between 5.25% to 5.5% and

with an inflation rate target of reaching 2% in the economy.

Therefore, if the economy is primarily powered by consumers, it is essential to reduce

their disposable income to restrict growth. The government can accomplish this by choosing a

contractionary fiscal policy, for instance, raising business and individual income taxes. Although

the government would have to make this unpleasant decision, it is necessary because it would

also result in lower consumption and investment costs. Lowering inflation using the same
method. Tax increases also increase government revenue, which can be used to support the

populace in the event of slower economic development and increased unemployment.

In addition, the approach undermines consumer and business trust by casting doubt on

what will happen in the future. As a result, US government investments would rise alarmingly,

resulting in no spending and pushing the country into recession. Theoretically, an inflationary

gap results from an economy that consumes too little due to a contractionary monetary policy.

Because of this, fixing it will require government intervention through an expansionary fiscal

policy.

Long-term consequences of interest rate increases might spectrum, and their influence on

economic growth will rely on a number of different variables. Interest rates are often adjusted by

the Federal Reserve owing to their evaluation of the economy's state and objectives, which may

include sustaining full-time labor and fostering price stabilization.