“The economy has been growing gangbusters over the last several years but now it’s settling back into a more normal pattern,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “We are in a period of transition.”
Consumer spending, which makes up roughly two-thirds of the economy, is expected to drive much of the second quarter’s growth. Continued government spending and business investments are also likely to prop up the GDP reading, which sums up goods and services produced in the United States.
However, a slowdown in home construction and other residential investments is expected to drag down economic growth — a turnaround after three straight quarters of solid growth.
“The economy is definitely not tanking, but there are a lot of indicators pointing toward a slowdown,” said Eugenio Alemán, chief economist at Raymond James. Still, he added, “as long as people have jobs, I don’t think there will be a recession.”
The rapid post-pandemic recovery has recently lost steam, as high borrowing costs force households and businesses to rethink spending. Home sales have stalled, manufacturing is slowing and factories are seeing a drop-off in demand for U.S.-made goods. Meanwhile, the unemployment rate — at 4.1 percent as of June — has edged up for three straight months.
Still, economists say the gradual cooldown is a welcome reprieve from years of too-hot growth that stoked inflation. The labor market remains strong and consumers are still spending, albeit with less gusto than they were a year ago.
The Federal Reserve, which has kept interest rates at a two-decade high since last summer, is expected to start cutting rates as early as September. In a congressional testimony this month, Fed Chair Jerome H. Powell said the United States is “no longer an overheated economy,” thanks in large part to a moderating labor market. “Conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated,” he added.
Although much of the economy is humming along, some pockets, such as housing and construction, have retreated more dramatically. Sales of new homes are down 7.4 percent from a year ago, while existing-home sales have fallen by 5.4 percent, according to fresh data this week.
In Seattle, new business at home-remodeling firm Gasper’s Construction has dropped 30 percent in the past year. Clients, who tend to rely on home-equity lines of credit, have pulled back in response to higher interest rates.
“Remodel projects are smaller and people are not willing to extend themselves as much,” owner Sarah Henry said.
Even so, Henry is optimistic. She’s looking to add three more people to her staff of 57, and says the Seattle housing market has been surprisingly resilient. Plus, the Fed appears poised to ease monetary policy in the coming months.
“Interest rates are going to give and, at some point, they’re going to come down,” she said. “That is very much going to help us.”
