US economy grew faster than expected in second quarter

The American economy grew more rapidly than expected in the second quarter, regaining its position as the best-performing country in the G7 group of the world’s seven largest economies and casting doubt over the need for big interest rate cuts this year.

Official figures showed the economy had expanded at an annualised rate of 3 per cent in the three months to the end of June, up from an initial estimate of 2.8 per cent last month. Economists had expected no change to the growth rate in the second quarter, which followed on from a 1.4 per cent annual expansion at the start of the year.

The robust growth performance throws into doubt the prospect of an outsized 50-basis-point interest rate cut from the US Federal Reserve next month, with stock market traders reducing their bets on a bumper monetary easing from 50 per cent, before the figures were released, to 30 per cent.

The Fed has indicated that it will cut interest rates for the first time in four years in September, on the back of falling inflation and to prop up a weakening labour market. However, overall economic growth, boosted by consumer and government spending, suggests that the economy in the United States is heading for a soft landing after two years of monetary tightening and high inflation.

The GDP upgrade will be welcomed by the incumbent Democratic administration ahead of November’s presidential election. Recent polls have shown that Kamala Harris, the vice-president and Democratic nominee, has pulled ahead of Donald Trump, the Republican, on voter trust on the economy. Separate new figures also paint a positive picture of the economy, with the level of unemployment claims remaining stable in August.

“US GDP came in stronger than expected and initial jobless claims [were] slightly better than expected,” Ryan Brandham, head of global capital markets at Validus Risk Management, said. “The data will reaffirm that growth remains strong in the US, even if the labour market is softening. There is some uncertainty in the market about whether the Fed will cut by 25 basis points or 50 basis points at the September meeting and today’s results would argue in favour of 25.”

The US Bureau of Economic Analysis said the growth had been driven higher by a rise in consumer spending and investment. Imports, which are a drag on growth figures, also rose in the second quarter.

The dollar and New York-listed stocks rallied, with the greenback up by 0.3 per cent against a basket of currencies, reversing a recent string of falls. On Wall Street equity markets reacted positively to the growth revision. By lunchtime in New York the broadly based S&P 500 was up 39.95 points, or 0.7 per cent, at 5,632.13, while the Dow Jones industrial average rose by 205.25 points, or 0.5 per cent, to 41,296.67, putting it on track for a record close. Yields on US treasury bonds were broadly unchanged.