Business

Economy Continues To Grow Despite Iran War-Driven Headwinds

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The U.S. economy showed surprising resilience Wednesday as growth was revised sharply higher, consumers continued spending and inflation came in slightly cooler than economists expected despite months of elevated energy costs due to the Iran war.

Gross domestic product grew at a 2.2% annual rate from April through June, up from the government’s previous 1.5% estimate, while consumer spending increased at a 3.8% annualized pace. Consumer spending accounts for roughly 70% of U.S. economic activity, making its continued strength particularly important as the Iran war has helped drive fuel costs higher and placed additional pressure on household and business budgets.

The positive numbers contrasted with surveys showing Americans increasingly pessimistic about inflation, their finances and the future labor market.

Underlying private demand was stronger, with final sales to private domestic purchasers rising 4.6% during the second quarter. Non-housing business investment rose about 9%, partly driven by continued spending on artificial intelligence infrastructure.

Wall Street economists had already been pointing to signs that the underlying economy was performing better than some gloomy headlines suggested.

“The headlines have been relentlessly negative in recent months,” Barclays’ Ajay Rajadhyaksha wrote in a research report, pointing instead to a “resilient US consumer” alongside strong corporate earnings and a major investment cycle.

Barclays also said recent U.S. economic data had continued to “surprise on the upside,” citing stronger business activity, improving new home sales and solid durable goods orders.

JPMorgan Chase offered a similarly upbeat assessment, saying the U.S. “stands out as the clear outperformer” after its measure of September business activity climbed to its highest level since July 2021. The bank said the reading was consistent with roughly 4% annualized GDP growth during the third quarter, above its own 3.5% forecast.

Consumers also continued opening their wallets in August. Personal consumption expenditures jumped 0.9% from July, while personal income rose just 0.2%.

The Federal Reserve’s preferred inflation measure rose 3.4% from a year earlier, while core inflation increased 3%, both still above the central bank’s 2% target. Core inflation, which excludes volatile food and energy prices, rose 0.2% during August, slightly less than economists expected.

The relatively strong data hasn’t translated into optimism among Americans. The University of Michigan’s consumer sentiment index fell to 48.1 in September, down 7% from August and 12.7% from a year earlier, while consumers’ one-year inflation expectations climbed to 4.6%.

The Iran war and other global supply disruptions helped drive U.S. diesel prices to a record $6.53 per gallon, sharply increasing transportation and agricultural costs. Record diesel prices have squeezed farmers during harvest season and could push grocery prices higher as increased production and freight costs work their way through the food supply chain.

Americans have also grown more concerned about employment even as unemployment-related indicators remained near historic lows. New unemployment benefit applications recently fell to nearly a six-decade low, while a New York Federal Reserve survey found Americans increasingly expected unemployment to rise over the coming year.