Tonight's data may bring more good news! Will the Fed's first rate cut in September be steady?

Driven by robust consumer spending and inventory buildup, the US economy may continue to grow in the second quarter, but the pace of expansion is expected to keep the Fed's rate cut expectations unchanged in September. In addition, other data is expected to show a significant slowdown in US inflation in the last quarter, with all indicators below 3%, which is good news for Fed officials.

Despite significant rate hikes by the Fed in 2022 and 2023, the US economy still outperforms other countries globally, with the unemployment rate rising to 4.1%, the highest level in two and a half years, but the labor market remains resilient.

Brian Bethune, an economics professor at Boston College, said, "The economic expansion is in line with the expectations of the 'golden-haired girl,' with growth slowing down, inflation rates falling, and consumer spending driving economic development."

Foreign media surveys of economists show that the US GDP in the last quarter may grow at an annualized rate of 2%, slightly higher than the Fed's expected non-inflationary growth rate of 1.8%.

However, this survey was conducted before the release of many data on Wednesday, which showed a narrowing of the US trade deficit in June, as well as increases in retail and wholesale inventories. These data prompted the Atlanta Fed to lower its second-quarter GDP growth forecast from 2.7% to 2.6%.

The US economy grew at a rate of 1.4% in the first quarter. Nevertheless, the growth rate is still significantly lower than the 4.2% recorded in the second half of last year.

Consumer spending, which accounts for more than two-thirds of the US economy, slowed to 1.5% in the first quarter and is expected to grow at a rate of around 2% in the second quarter, with most of the growth occurring in June.

Businesses have accumulated more inventory, and economists estimate that after dragging down GDP growth for two consecutive quarters, inventory may contribute at least one percentage point to GDP growth. While inventory is expected to boost the economy, economists project domestic demand to grow at a rate of around 2.4%.

Expectations for GDP growth indicate an acceleration in productivity, which will slow down the growth rate of labor costs and ultimately alleviate price pressures. The US core PCE is expected to soar at a rate of 3.7% in the first quarter before slowing to 2.7% in the second quarter.

The most widely used price measure in the US economy, the GDP deflator, is expected to grow by 2.6%, after jumping to 3.1% in the first quarter.

Trade Deficit Drags Down US GDP

Dan North, Senior Economist at Allianz Trade North America, said, "Inflation is likely to be more important than actual growth numbers."

The Fed has kept the overnight benchmark rate in the current range of 5.25%-5.50% over the past year.

Since 2022, the Fed has raised the policy rate by 525 basis points, with inflation slowing down and the labor market cooling, boosting financial market expectations for three rate cuts starting in September this year.

After moderate growth in the first quarter, it is expected that spending on equipment by businesses will accelerate. Government spending is also expected to contribute to economic growth, but due to slowing global demand and a strong dollar, soft exports may drag down economic growth Pantheon Macroeconomics estimates that the trade deficit will drag down GDP growth by 1.4 percentage points, the largest drag in over two years. Inventory growth may offset the negative impact on GDP. The surge in spring mortgage rates may disrupt the recovery of the real estate market.

After residential investment, including housing construction and sales, achieved double-digit growth in the first quarter, it is expected to contract in the first quarter after double-digit growth.

Despite expectations of accelerated economic growth, the economic outlook for the United States in the second half of this year is uncertain. The labor market is slowing down, which will affect wage growth. The savings rate is far below the pre-COVID-19 average, and economists estimate that the impact of most of the Fed's rate hikes has not yet materialized. State and local government revenues are also slowing, which could erode spending.

Some are concerned about new tariffs, as businesses may import goods ahead of time if former President Trump returns to the White House in the November presidential election.

Nevertheless, economists expect the U.S. to avoid a recession, and the Fed is expected to cut interest rates. Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, stated:

"Historically, changes in corporate borrowing costs for small and medium-sized enterprises have taken about two years to restrain GDP growth, indicating that the impact of the Fed's rate hike cycle has largely not materialized, with the rate hike cycle ending just 12 months ago. It is expected that the GDP growth rate in the second half of the year will slow to the range of 1% to 1.5%."