U.S. Economic & Credit Outlook
After expanding by an unexpectedly strong 3.1% in 2023 (Q4/Q4), U.S. gross domestic product after inflation (real GDP) grew by 1.4% in the first quarter and is expected to rise 2.0% and 1.6% in the second quarter and second half of 2024, respectively.1 Slower—but not too slow—economic growth should help put inflation on a path back toward 2%, allow the Federal Reserve to begin cutting interest rates later this year, and improve the odds of the economy achieving a “soft landing.” While it is not our central forecast, if a recession does arrive, we expect it will be a mild one.
Nonfarm payroll employment averaged just under 248,000 monthly gains in 2024 through May, although the household survey of employment, which uses a different methodology, posted a small decline in jobs over the same period. The truth is probably somewhere between the two surveys, though it will take more detailed data to resolve their divergent signals. Unemployment edged up, helping slow growth in average hourly earnings to 4.1% YoY in May, about 0.5% lower than a year ago but still a little higher than the Fed would wish. Job vacancies also have increased, bringing the ratio of openings to unemployed persons back near its pre-pandemic level, and jobless claims have been moving higher. Labor market conditions appear to be loosening. We expect job and wage growth to slow in the second half of 2024, which should dampen gains in nominal personal income. If inflation gradually slows, however, real income growth should improve modestly.
As inflation picked up, real personal consumption expenditure (PCE) slowed to 1.5% in the first quarter and is running slightly below that so far in Q2. Goods spending remained sluggish. Services rose strongly in Q1 but slowed in April and May. After a long slide, the saving rate picked up in April and May. It appears that excess savings accumulated during the pandemic have been largely spent, driving households to slow spending relative to income and boost savings. We think this is a healthy development that should reduce the risk of a rapid downshift in PCE later.
Real residential investment jumped 16.0% in the first quarter, but it remains down more than 15% from its peak in 1Q2021 and appears poised for another slowdown. Higher mortgage rates and elevated home prices sharply reduced housing affordability over the past several years. New and existing home sales fell from over 7 million in 2021 to just 4.7 million units (annualized) in May, and multifamily housing starts are down roughly 50% as record supply helped lower rents and curtail new investment. We expect significantly lower growth in residential investment over the remainder of the year, although both activity and prices could rebound quickly if the Fed cuts rates significantly next year.
Business investment expanded by 4.4% in Q1, but results by sector remain mixed. Real business equipment spending rose just 1.6% in Q1and, given weak orders and shipments of core capital goods, appear set for several more quarters of tepid growth. After surging in 2023 as companies moved production from overseas and took advantage of incentives authorized in the Inflation Reduction Act (IRA) and CHIPS and Science Act of 2022 (CHIPS), real investment in business structures slowed to just 3.4% in Q1 and is likely to remain in low single digits this year. Investment in intellectual property has accelerated, however, and should remain elevated. Overall, we continue to expect modest growth in business investment in 2024.
Government consumption rose 1.8% in Q1, less than half the 2023 pace, as federal spending turned slightly negative and state and local government (S&L) spending moderated. A slower-growing economy should weigh on tax receipts and curtail S&L spending in 2024, especially after a strong period of hiring last year. With a presidential election coming in November, major new spending legislation appears unlikely until 2025, and we expect little real growth in federal government spending in 2024. We expect tepid growth in government spending this year.
Of course, the federal government continues to run a large deficit (about 6% of GDP in Q1) that must be financed with Treasury bill, note, and bond sales. A combination of higher taxes and lower spending could reduce budget deficits in the future, albeit with uncertain implications for economic growth. However, an aging population, low birth rate, volatile immigration situation, and rising defense vulnerabilities—among other fiscal challenges—do not offer easy solutions. While this is not news, we think it will keep risk premiums above their pre-pandemic levels for some time.
1Source for all economic data in this discussion topic is Macrobond. Calculations by Flaherty & Crumrine.