"The consumption giant" continues to exert force, the US Q2 economic growth rate unexpectedly revised upwards! Is a "soft landing" becoming more likely?

According to the latest information from Zhitong Finance and Economics APP, the growth rate of the US economy in the second quarter was slightly higher than the initial economic report showed. The Q2 Gross Domestic Product (GDP) growth rate was revised up from the initial estimate of 2.8% to 3%, fully reflecting that the upward revision of consumer spending offset the impact of weakness in other GDP components.

Based on the statistics released by the Bureau of Economic Analysis on Thursday, the annualized quarterly GDP growth rate for the period from April to June in the United States was revised slightly up from the previous 2.8% to 3%. The core engine of US economic expansion, personal consumer spending, showed a revised growth of 2.9%, compared to the initial estimate of 2.3%.

Another government statistical report released on Thursday showed that the number of initial jobless claims in the United States for the week ending was almost unchanged at about 231,000, which was in line with market expectations and even slightly lower than the previous value.

Additionally, data released on Thursday also indicated that the seasonally adjusted core PCE price index for the second quarter in the United States was revised down to 2.8% from the previous value of 2.9%.

In early August, after the unexpectedly positive July unemployment rate triggered the "Sam Rule," market expectations of a US economic recession surged, raising the possibility of a 50 basis point rate cut by the Federal Reserve in September.

However, with the recent relatively optimistic initial jobless claims data and continued mild cooling of inflation, coupled with better-than-expected retail sales growth in July, it is evident that consumers remain resilient even in the face of high prices and borrowing costs. The resilience of consumer spending will undoubtedly strongly drive the giant ship of the US economy to continue sailing far, as 70%-80% of the components of the US GDP are closely related to consumption. Therefore, traders are currently betting that a 25 basis point rate cut in September is the most likely scenario, bringing the prospect of a "soft landing" for the US economy back into view.

Is the prospect of a "soft landing" for the US economy becoming more likely?

The latest announcement of the unexpectedly revised GDP growth rate, along with the recent trend of initial jobless claims meeting expectations and showing a cooling trend, the continued expansion of the crucial service sector PMI for the US economy, and the ongoing decline in inflation, perfectly align with the long-awaited prospect of a "soft landing" for the US economy by Federal Reserve officials.

Following the release of these latest economic data, S&P 500 index futures have remained near historic highs, and the CME "FedWatch Tool" shows that traders are generally betting on a 25 basis point rate cut by the Federal Reserve in September, rather than the 50 basis point rate cut they had briefly bet on after the weak July non-farm payroll report. This reflects that traders in both the stock market and interest rate futures market are increasingly confident in the prospect of a "soft landing" for the US economy The government's other set of statistical data for this period shows another key indicator of US economic activity - Gross Domestic Income (GDI), which grew by 1.3% on an annualized quarter-on-quarter basis, matching the first quarter's growth rate. Gross Domestic Product (GDP) measures the total expenditure on goods and services, while GDI measures the income and costs generated by producing these goods and services. The average growth rate of the two indicators is around 2.1%.

So far this year, US economic growth has slowed down after accelerating in the second half of 2023, but still follows the basic path of a "soft landing". Some forecasters believe that as high borrowing costs continue to permeate the US economy, the remaining time in 2024 will further slow down. Meanwhile, as the inflation rate gradually slows down and the Federal Reserve is likely to start a rate-cutting cycle next month, this may significantly alleviate demand pressures for industries heavily impacted by high borrowing costs such as housing and manufacturing, thereby driving accelerated growth in the US economy.

In the breakdown of US GDP, the vast majority is closely related to consumer spending, with rough estimates showing that 70%-80% of the components of US GDP are closely related to consumption. The upward adjustment in consumer spending reflects the resilience of American consumers, who are showing an increasing purchasing power for goods and services. The main reasons may lie in the continuous growth of spending in healthcare, housing, utilities, and the entertainment industry.

At the same time, the US Bureau of Economic Analysis has lowered the scale of business investment, inventories, net exports, residential investment, and government spending in the latest GDP report, but these have been offset by the upward revision of US consumer spending, which accounts for a higher proportion of GDP and is more resilient.

Optimistic Trend in Corporate Profits

GDI statistics mainly include corporate profit figures. The latest revised data shows that in the second quarter, adjusted pre-tax profits of US enterprises increased by 1.7%. After-tax profits as a share of non-financial corporate value added, which measures the overall profit margin, rose slightly from 15.2% in the previous quarter to 15.4% in the second quarter, reflecting that corporate profits, which have been continuously under pressure, also have resilience. This is expected to boost overall EPS profit expectations for the S&P 500 index and further drive US stocks to new highs.

Discussions around corporate profits have become a central topic in the 2024 US presidential election campaign, with significant differences between the two party candidates. Democratic presidential candidate and Vice President Kamala Harris has proposed comprehensive new family measures at the expense of profits. She is seeking significant increases in taxes for companies and high-income individuals, while former President Donald Trump has promised new tax cuts to boost the US economy Good news has also come in terms of inflation, as the Federal Reserve's preferred inflation measure - the core personal consumption expenditures index (core PCE) excluding food and energy - increased at an annualized rate of 2.8% in the second quarter, while the preliminary estimate was 2.9%. This data undoubtedly provides important support for the prospect of a soft landing for the U.S. economy.

Economists are looking forward to the more detailed monthly core PCE data to be released on Friday, seeking clues for a Fed rate cut - specifically looking at the month-on-month and year-on-year growth rates of core PCE for July. Currently, economists expect this index, excluding food and energy, to grow by 2.7% compared to the same period last year, slightly higher than June's 2.6%. It is anticipated that core PCE will increase by 0.2% month-on-month, consistent with the June statistics.

Federal Reserve officials have recently indicated that with concerns about inflation easing, they are now more focused on the labor market aspect of their dual mandate. Fed Chair Powell stated last week that Fed officials are not seeking or welcoming further cooling of labor market conditions. More significantly, in a speech of less than 20 minutes last week, Powell made the most explicit signal from the Fed regarding a rate cut, not only officially mentioning that "the time for monetary policy adjustment has come," implying an upcoming rate cut cycle, but also suggesting through various wordings that the Fed's future focus is to avoid an economic downturn and ensure a "soft landing" for the U.S. economy