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So far in 2024, the U.S. economy has traveled a winding road. As we began the year, expectations were for turbulence ahead, given stubbornly high inflation and interest rates, restrictive monetary policy from the Fed, and a slowdown in consumer and business spending. Instead, strength in hiring fueled consumer spending despite rising rates. Still, GDP growth slowed to 1.3 percent in the first quarter (from 3.4 percent in the fourth quarter of 2023), leading to more uncertainty on where the economy will go in the second half of the year.
One of the primary drivers of this economic uncertainty is inflation. After falling from a high of 9.1 percent in summer 2022, year-over-year consumer inflation has cooled, landing at 3.3 percent in May. While this represents an improvement from recent highs, inflation remains well above the Fed’s 2 percent target, with the pace of improvement slowed. This will continue to serve as a major risk in the second half of the year for markets and the economy.
All Eyes Are on Consumer Spending
Consumer spending will be pivotal in determining which path the economy takes, as personal consumption growth accounts for almost two-thirds of GDP.
In the first half, consumers remained ready travel companions, and a robust job market fueled their willingness to spend. In fact, the economy added nearly 250,000 new jobs per month through May 2024, leading to strong wage growth on a historical basis.
As we look ahead, though, do signposts indicate bumpier terrain in sight? Hiring and annual wage growth cooled notably in April, and while these numbers unexpectedly popped again in May, the unemployment rate breached the 4 percent mark for the first time since January 2022, while the labor force participation rate declined. This uneven landscape has been paired with wavering consumer confidence so far this year—and confidence has historically been linked to consumer spending growth.
Signs of Stress Under the Job Market Surface?
Source: Bureau of Labor Statistics
While signs show that we may be in for slower consumer spending growth in the third and fourth quarters, it's crucial to note that slower growth is still growth.
Business Spending Will Face Challenges
Business spending, including investment in structures, equipment, and residential real estate, is another key economic growth driver. Gross private domestic investment (GPDI) showed impressive momentum to start the year. Annualized growth jumped from 0.7 percent in the fourth quarter of 2023 to a robust 3.2 percent in the first quarter of 2024.
While providing an initial tailwind, the path ahead looks more challenging. Persistently tight monetary policy from the Fed and declining business confidence suggest that investment growth will likely moderate.
Export Growth Is on the Upswing
Net exports have largely been a headwind to GDP growth in recent years as imports have outpaced exports. This trend continued in the first quarter, as exports rose 0.9 percent while imports surged 7.2 percent.
Positive Net Exports Good News for Trade Deficit
Sources: Bureau of Economic Analysis, Haver Analytics
Keep in mind that net exports can be volatile. So, despite their big pull against growth in the first half of the year, we can expect net exports to become more supportive in the second half as export growth picks up and import growth cools.
November Elections May Impact Government Spending
After experiencing significant growth in 2023, government spending slowed to start 2024 due to waning federal spending. At the state and local level, we saw an uptick in spending to start the year, but those expenditures are expected to cool as states comply with balanced budget rules following 2023's tax revenue slowdown.
Moderate government spending growth is projected through year-end, though the path remains uncertain with potential policy changes after the November elections.
Slow Growth Is Still Growth
Right now, the economy finds itself on reasonably stable footing, with signs pointing to continued though slower growth throughout the rest of 2024. While the pace is set to slow from last year's clip, this can help ease lingering inflationary pressures and set the stage for a potential soft landing that supports financial markets through year-end.
The Direction of GDP Growth for 2024
Source: Commonwealth
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