US growth likely picked up in final quarter after slow start to 2024, reflecting resilient economy
WASHINGTON — The U.S. economy, driven by strong consumer spending, is expected to regain some momentum this spring after starting 2024 at a slow pace.
The Commerce Department is expected to report Thursday that gross domestic product (GDP) — the economy’s total output of goods and services — grew at a solid, if unspectacular, annual pace of 1.9% from April to June, according to a survey of forecasters by data firm FactSet. That would be up from 1.4% annual growth in the January-March quarter.
Despite this likely recovery, the U.S. economy, the world’s largest, has clearly cooled in the face of the highest borrowing rates in decades. From mid-2022 to the end of 2023, annualized GDP growth has has exceeded 2% for six consecutive quarters.
This year’s slowdown largely reflects much higher borrowing rates for home and auto loans, credit cards and many business loans resulting from the Federal Reserve’s aggressive round of rate hikes as part of its policy to tame inflation. increased its reference rate 11 times in 2022 and 2023, reaching its current 23-year peak of around 5.3%.
The Fed responded to the spike in inflation that began in the spring of 2021, as the economy rebounded unexpectedly quickly from the COVID-19 recession, causing severe supply shortages. Russia’s invasion of Ukraine in February 2022 made matters worse by driving up prices for the energy and grains the world depends on. Prices skyrocketed across the country and around the world.
US inflation, measured year-on-year, has finally fallen – from 9.1% in June 2022 to the current 3%Economists had long predicted that rising borrowing costs would push the United States into recession. Yet the economy continued to fire on. Consumers, whose spending accounts for about 70% of GDP, kept buying things, buoyed by a strong job market and the savings they had accumulated during COVID-19 lockdowns.
The slowdown earlier this year was largely caused by two factors, each of which can vary widely from quarter to quarter: a surge in imports and a decline in business inventories. Neither trend revealed much about the underlying health of the economy. Consumer spending also slowed, rising at an annual rate of 1.5% from January to March, after topping 3% in the third and fourth quarters of 2023.
Joseph Brusuelas, chief economist at tax and advisory firm RSM, said consumer spending likely rebounded to a solid 2.5% annual pace last quarter. Overall, Brusuelas forecasts overall annual growth of 2.4% for the quarter. But this time, he said, the expansion was likely overblown by a recovery in business inventories.
Dan North, senior economist at Allianz Trade, noted that the quarterly GDP report also contains the Fed’s preferred measure of inflation, the personal consumption expenditures price index.
“Perhaps inflation is more important in this report than growth,” North said.
The PCE index is expected to show that inflationary pressure eased in the April-June quarter after accelerating to an annual rate of 3.4% in the January-March period, from 1.8% in the last three months of 2023.
Fed officials have made clear that with inflation slowing toward their 2% target level, they are prepared to begin cutting rates soon, which they are expected to do in September.
RSM’s Brusuelas said he believes the central bank should not wait that long, given that the economy is slowing and inflation is falling.
“We believe the Fed is missing an opportunity to take the lead in a slowing economy,” he wrote in a research report.
