By Lucia Mutikani
WASHINGTON (Reuters) – The U.S. economy maintained a fairly solid pace of growth in the second quarter and activity appears to have gathered speed this quarter, but a looming government shutdown and an ongoing strike by auto workers are dimming the outlook for the rest of 2023.
Tight labor market conditions continue to prevail, with the number of Americans filing new claims for unemployment benefits rising slightly last week, other data showed on Thursday.
Some economists believe that the economy’s resilience and tight labor market could give the Federal Reserve ammunition to raise interest rates again in November. Others, however, expect the darkening cloud over the economy would discourage the U.S. central bank from tightening monetary policy further.
“The labor market is rock solid with low jobless claims and no rebalancing in economic demand to be seen,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “The Fed hasn’t nailed inflation yet and this increases the risks of another rate hike this year.”
Gross domestic product increased at an unrevised 2.1% annualized rate last quarter, the government said in its third estimate of GDP for the April-June period. That was in line with economists’ expectations.
Growth for the first quarter was raised to a 2.2% rate from the previously reported 2.0% pace. The government also revised GDP data from 2017 to incorporate new source information and made some statistical improvements, such as the treatment of regulated investment companies and real estate investment trusts. It changed the base year to 2017 from 2012.
The economic picture was little changed from 2017 to 2022, with GDP growing at an average annual rate of 2.2%, up from the previously estimated 2.1% pace. Since March 2022, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.
STRONG LABOR MARKET
The economy is being underpinned by a resilient labor market, which is driving strong wage gains. Growth estimates for the July-September quarter are currently as high as a 4.9% rate.
But bitter infighting among Republicans in the U.S. House of Representatives over spending could lead to a government shutdown, sapping momentum in the fourth quarter.
Hundreds of thousands of federal workers will be furloughed and a wide range of services, from financial oversight to medical research, will be suspended if Congress does not provide funding for the new fiscal year that starts on Oct. 1.
The United Auto Workers union strike against General Motors, Stellantis and Ford Motor, is expected to depress motor vehicle production and raise automobile prices. The strike, which started almost two weeks ago, is already having ripple effects on the supply chains.
The labor market has continued to hold its own so far. A second report from the Labor Department on Thursday showed initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 204,000 for the week ended Sept. 23. Economists had forecast 215,000 claims for the latest week.
Claims have been in the lower end of their 194,000-265,000 range this year. The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 12,000 to 1.670 million during the week ending Sept. 16, the claims report showed.
The so-called continuing claims covered the period during which the government surveyed households for September’s unemployment rate. Continuing claims were little changed between the August and September survey weeks. The unemployment rate increased to 3.8% in August from 3.5% in July.
(Reporting by Lucia Mutikani; Editing by Paul Simao)