US economy grows at fastest pace in nearly two years as spending roars back

Fresh government data showed the US economy grew at a much stronger pace than initially estimated – news that dented hopes the Federal Reserve’s will cut rates aggressively in the months ahead.

Gross domestic product, which measures spending on goods and services, expanded at a 3.8% annual pace in the second quarter, according to a final estimate from the Commerce Department.

That marked the fastest pace in nearly two years, after an outsize upward adjustment from an initial 3% estimate and later revision to 3.3%.

It was driven by a boom in consumer spending, which increased 2.5% – far above the previous 1.6% estimate and the 0.6% rate in the first quarter.

Stephen Miran, the new Trump-appointed Fed member, earlier in the day called for a rapid series of 50-basis-point cuts, arguing that current restrictive policy can leave the economy “more vulnerable to downside shocks.”

While markets continued to bet on a quarter-point cut at the Fed’s October meeting, those odds dropped after the GDP revision showed the economy has been more resilient than expected.

Last week, the Fed cut rates by a quarter point to 4% to 4.25%, and its dot-plot indicated there would be at least two cuts this year – “but the case for back-to-back cuts is no slam dunk,” Bill Adams, chief economist for Comerica Bank, said in a note after the GDP release.

Investments in software and AI helped fuel the growth in Thursday’s revised figures. Spending on intellectual property, like research and development and software, jumped 15%, the highest annual rate since 1999.

Trade tensions can largely impact the GDP reading. In the first quarter, GDP shrank 0.6% as businesses rushed to import foreign goods ahead of Trump’s tariff deadlines.

“Thursday’s GDP strength likely doesn’t change the Federal Reserve’s expected path of rate cuts, since the data is backward looking,” Paul Stanley, chief investment officer at Granite Bay Wealth Management, said in a note.

However, more recent economic data has been a mixed bag. Retail sales jumped over the summer on a surprisingly strong back-to-school shopping season, but hiring slumped.

Inflation has also remained stubbornly above the Fed’s 2% goal, heating up to a 2.9% pace in August, according to the Bureau of Labor Statistics’ Consumer Price Index.

Meanwhile, initial jobless claims plunged to 218,000 for the week ended Sept. 20 – down 14,000 from the previous figure and far below estimates of 235,000, the Labor Department said Thursday.

While payroll growth has slowed and job openings are down, the initial claims data eased some concerns around the labor market, particularly concerning layoffs and firings.

But the Fed attributed its September rate cut to growing employment risks, and Fed Chair Jerome Powell earlier signaled that a weakening labor market would serve as the reason to ease policy.

“We may be in one of those cycles again where good news becomes ‘bad news,’” Ken Mahoney, CEO of Mahoney Asset Management, told The Post. “With a better-than-expected GDP and jobless claims not as bad as expected, it starts to dismantle the case for the Fed to keep cutting.”

Eric Teal, chief investment officer for Comerica Wealth Management, said “the stronger economic readings likely provide less cover for additional rate cuts.”

“But real interest rates remain high and there is an opportunity to further stimulate demand in more rate-sensitive sectors that have been in lockdown like housing,” he added.

During a speech Tuesday, Powell noted that the economy “is showing resilience in the midst of substantial changes in trade and immigration policies.”

He left the door open for rate cuts, though, adding that policy is still “modestly restrictive” on growth.