Why did the economist cross the road? To get to the other side of the yield curve! 🤓
The U.S. economy has been on a wild ride in the first half of 2024.
GDP growth has slowed. Inflation persists.
The Fed is trying to thread the needle between raising rates and supporting the recovery.
It's enough to make even the most seasoned economist scratch their head and wonder, “What's next?”
But unlike that joke about the yield curve, at least this economist has a good reason to be confused!
Gross Domestic Product (GDP) Growth: Slowing Momentum
The U.S. GDP grew at an annual rate of 1.4% in Q1 2024, a significant decrease from the 3.4% growth recorded in the previous quarter.
This slowdown, the most pronounced since early 2022, fell short of the 2.5% forecast.
A closer examination of the GDP components reveals the following:
Consumer Spending
Consumer spending, which accounts for nearly 70% of economic activity, dropped to 2.5% from 3.3% in the previous quarter.
This decline can be attributed to factors such as rising inflation, higher interest rates, and a slowdown in job growth.
The PCE price index rose by 4.4% in Q1 2024. This measures inflation.
It outpaced the 4.3% increase in disposable personal income.
Disposable income has decreased.
This has led to less consumer spending on durable goods, like automobiles and appliances.
There is also a slowdown in spending on services.
Non-Residential Investment
Non-residential investment, which includes business spending on equipment, software, and structures, slowed to 2.9% in Q1 2024.
This slowdown reflects the cautious approach taken by businesses amid economic uncertainty.
Specifically, business investment in equipment declined by 0.1%, while investment in structures increased by 3.7%.
The slowdown in equipment investment can be attributed to factors such as supply chain disruptions, labor shortages, and concerns about the future economic outlook.
Government Spending
Government spending rose by 1.2%.
This increase was mainly due to more federal spending on national defense.
State and local governments spent more on education and healthcare.
Federal government spending increased by 1.0%, while state and local government spending increased by 1.3%.
The increase in government spending can be attributed to factors such as the ongoing response to the COVID-19 pandemic, investments in infrastructure, and efforts to support economic recovery.
Exports and Imports
Exports fell sharply to 0.9%, while imports jumped to 7.2%.
This widening trade deficit highlights the challenges faced by U.S. businesses in the global marketplace and the impact of a strong U.S. dollar on export competitiveness.
The strong dollar has made U.S. exports more expensive for foreign buyers, while making imports cheaper for U.S. consumers.
This has led to a decrease in demand for U.S. exports and an increase in demand for imports.
Residential Investment
Residential investment, which includes spending on new housing construction and home improvements, surged by 13.9%.
This growth can be attributed to low mortgage rates and a continued demand for housing, despite the challenges posed by high prices and limited inventory.
Specifically, investment in new single-family housing increased by 15.7%, while investment in new multifamily housing increased by 10.2%.
The surge in residential investment is due to several factors.
The shift towards remote work has raised demand for larger homes in suburban and exurban areas.
Additionally, more millennials are entering the housing market.
Inflation and Monetary Policy: Persistent Challenges
Inflation concerns continue to be a significant challenge for the U.S. economy.
However, there are signs of easing inflationary pressures.
The core PCE price index, the Federal Reserve's preferred gauge of inflation, edged up by only 0.1% in May, its smallest rise since late 2020.
Despite this improvement, the annual inflation rate remains above the Fed's 2% target.
The Federal Reserve has maintained its benchmark interest rate at 5.25-5.50%, with potential cuts expected later in the year.
The central bank's decision to hold steady on interest rates reflects its commitment to bringing inflation under control while balancing the risks of a potential recession.
The Fed has indicated that it will continue to monitor economic data and adjust monetary policy as needed to support the economy and maintain price stability.
Consumer Spending and Retail Sales: Cooling Trends
Consumer spending, the backbone of the U.S. economy, is showing signs of cooling.
May's retail and food services sales were $703.1 billion, up just 0.1% from the previous month.
This slowdown can be attributed to several factors:
Weaker Gains in Disposable Income
Disposable personal income, which is the amount of money households have available for spending and saving after taxes, has seen weaker gains in recent months.
In Q1 2024, disposable personal income increased by 4.3%, down from 4.5% in the previous quarter.
This slowdown in income growth has put pressure on consumer spending, as households have less money available for discretionary purchases.
Depleted Pandemic Savings
During the pandemic, many households accumulated significant savings due to reduced spending and government assistance.
However, as the economy has recovered, these savings have been depleted, limiting the ability of consumers to maintain high levels of spending.
The personal saving rate, which measures the percentage of disposable personal income that households save, declined to 4.6% in Q1 2024, down from 5.1% in the previous quarter.
Rising Household Debt and Loan Delinquencies
Household debt, including credit card balances, auto loans, and student loans, has been on the rise.
In Q1 2024, household debt increased by 2.5%, outpacing the 1.9% increase in disposable personal income.
Additionally, loan delinquency rates have been increasing, particularly for subprime borrowers.
These factors have put pressure on consumer spending and may lead to a slowdown in economic growth, as households allocate more of their income towards debt servicing and repayment.
Labor Market: Robust but Softening
The U.S. labor market remains strong, with unemployment rates near historic lows. However, there are signs of softening in the labor market:
Rising Unemployment Claims
Initial jobless claims have been trending upward in recent weeks, indicating that more workers are losing their jobs or being laid off.
While the number of claims remains low by historical standards, the upward trend is a cause for concern.
In the week ending June 24, 2024, initial jobless claims rose to 262,000, up from 248,000 in the previous week.
Declining Labor Force Participation Rate
The labor force participation rate, which measures the percentage of the working-age population that is employed or actively seeking employment, is expected to decline in the coming months.
This decline could be driven by factors such as early retirement, discouraged workers leaving the labor force, and the impact of long-term unemployment on job search efforts.
In May 2024, the labor force participation rate was 62.6%, down from 62.8% in April.
Business Investment and Manufacturing: Mixed Signals
The manufacturing sector has shown mixed signals in the first half of 2024:
Steady Manufacturing Profits
Manufacturing profits have remained stable at $200.0 billion.
Despite pandemic challenges and economic uncertainty, businesses in this sector have maintained profitability.
However, this steady level of profits may not be sustainable in the long run, as businesses face ongoing challenges such as supply chain disruptions, labor shortages, and rising input costs.
Slight Increase in Durable Goods Orders
Durable goods orders, which are a leading indicator of business investment, have increased slightly to $283.1 billion.
This increase suggests that businesses are still investing in equipment and machinery, although at a slower pace than in previous quarters.
The slight rise in durable goods orders is due to several factors.
Businesses need to replace aging equipment.
There is also ongoing demand for certain goods, especially in the technology and healthcare sectors.
Slowing Investment Growth
Despite the slight increase in durable goods orders, investment growth has slowed overall.
In Q1 2024, non-residential fixed investment increased by 2.7%, down from 2.9% in the previous quarter.
This slowdown can be attributed to factors such as high interest rates, economic uncertainty, and the impact of trade tensions on global supply chains.
Businesses may be hesitant to make large investments in the current economic climate, preferring instead to focus on cost-cutting measures and preserving cash flow.
Housing Market: Volatile Dynamics
The U.S. housing market has experienced volatile dynamics in the first half of 2024:
Declining New Home Sales
New home sales dropped 11.3% in May, reflecting the impact of high prices and rising mortgage rates on housing demand.
This decline is a concern for the broader economy, as the housing sector is a significant driver of economic growth.
The median sales price of new houses sold in May 2024 was $416,300, up 3.5% from May 2023, while the average sales price was $487,700, up 2.9% from the previous year.
Decreasing Housing Starts
Housing starts, which measure the number of new residential construction projects, decreased by 5.5% in May.
This decline is a reflection of the challenges faced by homebuilders, including labor shortages, supply chain disruptions, and rising material costs.
In May 2024, housing starts were at a seasonally adjusted annual rate of 1.63 million units, down from 1.72 million units in April.
Steady Homeownership Rate
Despite the challenges faced by the housing market, the homeownership rate remained steady at 65.6% in the first half of 2024.
This steady rate suggests that the demand for housing remains strong, although affordability remains a significant challenge for many potential homebuyers.
The median existing-home price for all housing types in May 2024 was $388,800, up 2.8% from May 2023.
International Trade: Widening Deficit
The U.S. trade deficit has widened significantly in the first half of 2024.
In April, the trade deficit reached $74.6 billion, reflecting the impact of a strong U.S. dollar on exports and the continued demand for imported goods.
This widening deficit is a concern for the broader economy, as it can lead to job losses in export-oriented industries and put pressure on domestic manufacturers.
The strong U.S. dollar has made U.S. exports more expensive for foreign buyers, while making imports cheaper for U.S. consumers.
This has led to a decrease in demand for U.S. exports and an increase in demand for imports.
In April 2024, U.S. exports were $258.3 billion, down 1.5% from March, while imports were $332.9 billion, up 1.2% from the previous month.
Outlook: Cautiously Optimistic
While the U.S. economy has shown resilience in the face of challenges, the outlook for the remainder of 2024 remains cautiously optimistic.
GDP growth could dip below 1% in the coming months, reflecting the impact of high inflation, rising interest rates, and global economic uncertainty.
However, there are signs that inflation may be easing, with the core PCE price index showing signs of moderation.
The Federal Reserve's upcoming decisions on interest rates will be crucial in managing inflation and supporting economic growth.
The Fed has indicated that it will continue to monitor economic data and adjust monetary policy as needed to support the economy and maintain price stability.
If inflation continues to ease and the labor market remains strong, the Fed may consider cutting interest rates later in the year to support economic growth.
However, if inflation remains high or the labor market weakens significantly, the Fed may need to maintain or even raise interest rates to bring inflation under control.
The U.S. economy has navigated a complex landscape in the first half of 2024, balancing resilience with challenges.
While GDP growth has slowed and inflation remains a concern, the economy has shown signs of adaptability and strength.
As the Federal Reserve continues to navigate the challenges posed by high inflation and rising interest rates, businesses and consumers will need to remain vigilant and adaptable in the face of economic uncertainty.
Despite the challenges, the outlook for the remainder of 2024 remains cautiously optimistic, with the potential for continued growth and stability in the months ahead.
The housing market, which has been a significant driver of economic growth in recent years, may continue to face challenges due to high prices and rising mortgage rates.
However, the steady homeownership rate suggests that the demand for housing remains strong, and the continued influx of millennials into the housing market may provide a boost to the sector in the coming years.
The manufacturing sector displayed mixed signals in early 2024.
It could continue facing challenges such as supply chain disruptions, labor shortages, and rising input costs.
However, the steady level of manufacturing profits suggests that businesses in this sector have been able to adapt to these challenges and maintain profitability.
Overall, the U.S. economy remains in a strong position, with a robust labor market, a resilient consumer base, and a diverse range of industries.
The country is facing high inflation, rising interest rates, and global economic uncertainty.
It is essential for policymakers, businesses, and consumers to collaborate to promote economic growth and stability in the coming months and years.
