Q2 GDP Growth Supports Rate Cuts This Year

Real GDP surprised to the upside in Q2 2024, expanding by a better-than-expected 2.8 percent quarter-over-quarter annualized in the quarter following a tepid 1.4 percent growth rate in Q1 2024.

Trusted Insights for What’s Ahead^®

• The Fed likely will view the data as evidence that the US economy is not collapsing amid elevated interest rates.
• The data should give the Fed some additional confidence that it can consider one or more interest rate cuts this year, but not more than that.
• The areas of domestic demand the Fed has more direct influence over are showing mixed readings:
  • Activity remains weak in housing, nonresidential structures and most types of capital equipment, and consumers are spending more on services they need rather than want.
  • Still, households spent more on expensive durable goods, companies splurged on transportation equipment, and imports surged in the quarter. Inventories also spiked.
• The report did show that Inflation continued to cool in the Q2, and other data suggest the labor market is holding up.
• However, there remain supply-side and other special factors that are keeping inflation sticky, which will likely cause the Fed to proceed cautiously when moderating its restrictive monetary policy stance.

Figure 1. Inventories and Goods Consumption Led Q2 Real GDP Growth

Sources: Bureau of Economic Analysis and The Conference Board.

Report Highlights

Economy performs better than expected in Q2. Real GDP grew by 2.8 percent in the second quarter after slowing to 1.4 percent in Q1. Gains were led by a sizable increase in inventories and a resurgence in consumer spending on goods. Additionally, government spending improved somewhat after slowing in the first quarter. Nonresidential investment was firmer in the quarter. Meanwhile, household spending on services moderated, residential investment was flat, and net exports weighed on the economy.

Consumers spend more on services they need and goods they want. According to the BEA’s press release.The increase in consumer spending reflected increases in both services and goods. Within services, the leading contributors were health care, housing and utilities, and recreation services. Within goods, the leading contributors were motor vehicles and parts, recreational goods and vehicles, furnishings and durable household equipment, and gasoline and other energy goods.

Inventories spike. BEA said that the increase in private inventory investment primarily reflected increases in wholesale trade and retail trade industries that were partly offset by a decrease in mining, utilities, and construction industries.

Investment performance mixed. Within nonresidential fixed investment, increases in transportation equipment and intellectual property products were partly offset by a decrease in structures. Residential structures were flat as spending on home sales, new construction, and renovations flagged.

Net exports cap economic growth. The increase in imports seemed to be driven by businesses, as it was led by capital goods, excluding automotive. Exports were positive in the quarter, but imports were stronger, resulting in a net exports drag on the economy.

Domestic demand remains robust, but consumers running low on inputs to spend. Final sales to domestic purchasers, a key measure of domestic demand remained robust increasing by 2.7 percent quarter-over-quarter annualized. Real disposable personal income (i.e., income after tax) slowed to 0.9 percent year-over-year in Q2 compared to 1.5 percent in Q1 and personal savings continued to slow from 3.8 percent in Q1 to 3.5 percent in Q2.

Good inflation news. In Q2 the personal consumption expenditure (PCE) price index slowed to 2.6 percent year-over-year from 2.7 percent year-over-year in Q1. The Core PCE price index (i.e., total less food and energy) slowed to 2.6 percent year-over-year in Q2 from 2.8 percent year-over-year in Q1.

Figure 2. Inflation on Its Way Back to Fed’s 2-percent Target

Sources: Bureau of Economic Analysis and The Conference Board.