U.S. economic growth probably accelerated in the second quarter, driven by strong consumer spending and inventory increases, but the pace of the expansion is not expected to affect market expectations for a September interest rate cut by the Federal Reserve.

The U.S. Commerce Department will release second-quarter GDP data tonight. The market currently expects the U.S. real GDP to be 2% in the second quarter, up from 1.4% in the previous quarter. At the same time, the market expects the U.S. core PCE price index to fall to 2.7% in the second quarter - which will be good news for Federal Reserve officials before their two-day policy meeting next week.

The U.S. economy has shown resilience despite the Federal Reserve's aggressive rate hikes in 2022 and 2023. Although the unemployment rate has risen to a two-and-a-half-year high of 4.1%, the resiliency of the labor market continues to support the U.S. economy. "The U.S. economic expansion fits the 'Goldilocks' outlook, with slower economic growth and lower inflation," said Brian Bethune, an economics professor at Boston College. "Consumer spending is driving economic growth."

Consumer spending accounts for more than two-thirds of the U.S. economy. The market currently expects the U.S. consumer spending to rise 2% in the second quarter, up from 1.5% in the previous quarter. In addition, economists estimate that as companies accumulate more inventories, this may contribute at least one percentage point to GDP growth - which has dragged down GDP growth for two consecutive quarters. Business equipment spending is also expected to accelerate in the second quarter after a modest increase in the first quarter. Government spending may also contribute to economic growth.

However, the trade deficit could weigh on U.S. economic growth due to slowing global demand and a stronger dollar. Pantheon Macroeconomics estimates the trade deficit will subtract as much as 1.4 percentage points from U.S. GDP growth, which would be the highest in more than two years.

A surge in mortgage rates in the spring may have derailed the housing market’s recovery, with residential investment, which includes homebuilding and sales, expected to contract after double-digit growth in the first quarter.

Although U.S. economic growth is expected to pick up, the outlook for the second half of this year remains unclear as the labor market shows signs of slowing, which will affect wage growth and further affect consumer spending. In addition, Americans' savings rate is also far below the pre-epidemic average. Economists estimate that most of the effects of the Fed's interest rate hikes are still to be seen; state and local government revenues are also slowing, which may lead to government spending cuts.

"Historically, it has taken about two years for changes in borrowing costs for small and medium-sized businesses to dampen GDP growth, suggesting that most of the impact of the Fed's rate hike cycle is still to come, as the Fed's rate hike cycle ended only 12 months ago," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "We expect US GDP growth to slow to a range of 1.0% to 1.5% in the second half of the year."

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