A funny thing happened on the way to the recession. According to the advance estimate recently released by the Bureau of Economic Analysis, real GDP in the U.S. increased at an annual rate of 2.4 percent in the second quarter of 2023. In the first quarter, real GDP expanded 2.0 percent.
This advance estimate will be revised a couple of times in the coming weeks, so it is possible the total GDP actually grew a bit slower — or faster — than what was recently reported. But the revisions will likely not be large, so the key point is that the U.S. economy actually expanded by about 2 percent in the first half of this year after adjusting for inflation. And future revisions notwithstanding, the pace of growth quite likely accelerated in the second quarter.
The funny thing about all of this is that it was not supposed to happen. Economists and analysts of every ilk spent most of last year debating whether the Fed's aggressive campaign of raising interest rates in an effort to curtail inflation would push the U.S. economy into an outright recession.
You will recall this debate generated a lot of speculation on one side about the severity of the pending recession and the prospects of a "soft landing" on the other. At that time, I don't think there was ever a strong consensus on the depth of the coming slowdown. But given the timing and the intensity of the Fed's tightening program, I think most analysts expected we would start to see the effects of higher interest rates in the GDP data by the middle of 2023.
Fast forward to now, the middle of the third quarter of 2023. The stock market is up a tidy 16 percent for the year to date, the rate of inflation has recently been clocked at about 3 percent, the unemployment rate is a stellar 3.5 percent, and the gravity-defying pace of growth in the overall economy just ticked up a notch to 2.4 percent. This may not be nirvana, but these numbers sure seem pretty good.
That's what makes it funny to me. I defy anybody to go back a year ago and find a published forecast that predicted the economic data would be anywhere close to where it is now. Regular readers of this column will recall I never bought into the "recession is imminent" narrative, but I did expect the pace of overall growth to get down below 1 percent for a quarter or two.
I thought there was a strong probability that some sectors of the economy would experience a significant contraction, nevertheless, I thought the chances of avoiding an overall recession might be in the range of 50-50 or perhaps a bit better. Therefore, I must admit that after 16 months of interest rate hikes, totaling an astonishing 5.25 percentage points, I am surprised to see that recent trends suggest economic growth might actually be … strengthening? In fact, I am extremely surprised.
It could be argued that this is a "happy" surprise and that maybe this will all work out better than anyone expected. But as a lifelong disciple of the dismal science, I do not like surprises — even good ones.