Will the US Economy Sustain Economic Growth for the Rest of 2024?

The U.S. economy grew far more than expected in the second quarter, at a pace that economists don’t believe is sustainable in the second half of the year. Gross domestic product (GDP), a measure of the economy’s output, grew at an annual rate of 2.8% in the second quarter, according to new data released Thursday by the Bureau of Economic Analysis. Remarkably, that number was double the annual rate in the first quarter. The growth was fueled by consumers who continued to spend, businesses that increased investments, and a government that boosted expenditures. However, economists say it can’t last.

High Interest Rates, Inflation Taking a Toll

So far in the early parts of the third quarter, evidence has been mounting that economic growth is slowing. “Earnings reports have been lackluster so far this earnings season, consumers are showing signs of tiring, and business capital investment will likely see a lull,” wrote Scott Anderson, chief U.S. economist at BMO. High interest rates and stubborn inflation have likely put the kibosh on continued spending growth, as the Federal Reserve continues to put pressure on the economy.

The Federal Reserve has held its influential fed funds rate at a more than two-decade high for the past year in an effort to curb inflation. A high fed funds rate makes borrowing more expensive for consumers and businesses, a move designed to slow the economy and tame price increases. Fed officials are widely expected to cut their key interest rate in September, keeping the strain on throughout the third quarter. “The economy has blemishes, and second-quarter growth, which did lag the second half of last year, is unsustainable,” wrote Moody’s Analytics Economist Scott Hoyt. “Inflation is still above the Federal Reserve’s target, so the Fed is keeping its foot on the monetary brake. ….The risks of the economy slowing more than desired are high.”

Consumer Spending Expected to Slow

Economists have long predicted a slowdown in consumers’ spending for the year’s second half, as headwinds weigh particularly on lower-income households. Younger people and those with less income weren’t able to build savings during the pandemic and have been relying on credit and a strong labor market to keep up their spending, economists theorize. As credit becomes harder and harder to come by and the labor market tips more in favor of employers, their spending will be harder to maintain. However, the bottom won’t completely fall out of spending, as wealthier households will continue to buoy retail sales, experts said. “Still-substantial excess savings built up during the pandemic by middle- and especially high-income households continue to support spending giving consumers cash to spend, especially as their wealth rises,” Hoyt said.

Trade Continues to Drag Growth

In Thursday’s release, all of the major components that go into calculating GDP contributed more to growth in the second quarter than in the one prior, Hoyt said. There was one exception: Imports grew more rapidly, which is a larger drag on overall growth. When U.S. consumers spend more on foreign products than U.S. producers sell to foreign consumers, GDP (which measures the country’s output) decreases. Wells Fargo economists said as consumer demand cools, trade could become less of a negative factor for GDP, but it’s not guaranteed.

Election Uncertainty Will Lead to Caution

With the presidential election up in the air and even more uncertainty caused by the end of President Joe Biden’s campaign, companies and consumers are keeping an eye on what’s ahead. The tax code, national debt, and numerous other financial matters at stake in the election, all of which have cascading effects on households’ finances. “Election and fiscal policy uncertainty will likely add to the malaise until businesses get more clarity about the future path of tax and spending policies of the Federal government and the shape of the economic slowdown,” BMO’s Anderson wrote.

In conclusion, while the U.S. economy experienced significant growth in the second quarter, economists are skeptical about its sustainability for the rest of 2024. High interest rates, inflation, slowing consumer spending, trade deficits, and election uncertainty are all factors that are expected to contribute to weaker economic conditions in the coming months. As the Federal Reserve’s efforts to fight inflation with high interest rates take their toll, economic growth is likely to slow in the second half of the year, even as the Fed is expected to start cutting rates. It remains to be seen how these factors will play out and impact the overall health of the U.S. economy.