GDP surge: 'The fundamentals are on the side of Harris'

Vice President Kamala Harris is moving into the lead role of selling the U.S. economy to voters just as the pitch is getting easier to make.

The government said Thursday that GDP increased at an annualized pace of 2.8 percent from April through June, far better than expected, even as a key measure of inflation has dropped below 3 percent.

That means the economy has stayed resilient without further stoking price spikes, leaving open a path for the Federal Reserve to begin cutting rates in September — a process that could lead to lower borrowing costs on everything from cars to homes.

“Overall, it’s a strong economy, and if you look at the different political forecasting models, the fundamentals are on the side of Harris,” said Jason Furman, a professor at Harvard University who previously served as chief economist to President Barack Obama.

Yet with just over 100 days until the presidential election, it’s unclear whether Harris will have any more luck than President Joe Biden did in boosting Americans' sentiments about the economy. While the U.S. has been experiencing steady growth and modern-era lows in joblessness for years now, that positive news has been dwarfed by widespread concerns about affordability amid multiple years of price spikes. But as inflation cools, people might begin to adapt to new higher cost levels, particularly as wages are now rising faster than prices.

One possible ray of hope for Harris: Polling firm Blueprint recently found only 23 percent of voters associate her with inflation.

The economy's growth in the second quarter was bolstered by robust consumer spending and business investment. Biden issued a statement after the report saying it “makes clear we now have the strongest economy in the world” and giving credit to “my and Vice President Harris’s economic agenda.”

In the meantime, Republicans continued to hammer Harris and other Democrats about how much prices have risen over the course of Biden’s presidency.

“The damage from Democrats’ reckless spending and the Biden-Harris Administration’s failed economic policies is done,” House Budget Chair Jodey Arrington said in a statement. “The goal should be to bring down the stubborn inflation that is crushing the American people and the high interest rates that are fueling the cost-of-living crisis.”

Although the topline GDP increase in the second quarter was much higher than the first — 2.8 percent vs. 1.4 percent — the underlying rate as measured by spending and investment showed that growth in the first half of the year held steady at about 2.6 percent.

Of course, the outlook is not without risks, even as the economy has held up much better than expected in the face of the Fed’s rate hike campaign.

Furman said there was “a little bit of an asterisk” on inflation, which hasn’t been tamed entirely, and economic growth at these levels could still keep prices rising faster than the Fed wants.

On the flip side, borrowing costs this high are weighing on economic activity, and the job market could weaken unexpectedly. The unemployment rate has increased from lows of 3.4 percent to 4.1 percent, but both the slow speed of the rise and the still-low level of joblessness — layoffs remain low — don’t suggest a recession is imminent.

“Rising unemployment and slowing wage growth will both scare people into saving more and constrain the spending power of people who remain unworried about the job market,” Pantheon Macro said in a note to clients.

Corporate investments have steadily risen over the past three quarters, suggesting that the private sector remains optimistic about the economy’s future prospects. But Pantheon said that trend isn’t guaranteed to continue.

“Business [investment] too is likely rise only modestly, given the severe financing constraint on small companies and the uncertainty over the economic outlook,” according to the firm, noting that President Donald Trump’s trade policy is also a concern: “An election campaign in which the current front-runner is threatening massive import tariffs is a disincentive to invest too.”