2024 midyear economic outlook: A bumpy second half?

Russell Price, Chief Economist – Ameriprise Financial

July 15, 2024

By most measures, the U.S. economy has been performing fairly well so far this year. Despite a slow start to 2024, recession fears have faded, inflation is easing, consumer finances remain strong and the job market — while softening — remains healthy. But will those trends hold? Here’s our economic outlook for the second half of 2024:

A slow start

The pace of economic growth was a bit weaker in the first quarter of the year. Real gross domestic product (GDP) — the broadest and most comprehensive measure of economic activity — grew by +1.4% at an annualized rate in the period, less than half the fourth quarter’s +3.4%, according to the Commerce Department.

Most of the deceleration, however, was due to fluctuations in business inventories and international trade. Still, consumer spending and business investment — the economy’s two most important components as together they account for about 85% of activity — grew at sound rates of +1.5% and +4.4%, respectively.

We believe the Commerce Department’s first estimate of Q2 real GDP should show a modest acceleration when reported in late July. We currently estimate growth for the period of about +2.4% and believe a similar pace over the second half of the year appears achievable. Despite the slow start in economic growth, we still see full-year GDP growth at about +2.2%.

A bumpy second half?

As we look to the second half of the year, we believe consumers remain in good financial health, capable of continuing to spend at a moderate pace. Consumer debt-to-income levels remain low relative to their history, according to the Federal Reserve, and levels of post-pandemic savings remain relatively high, according to checking and savings account data from Bank of America. Consumer checking and savings accounts held about 60% more assets in April of this year relative to 2019 ending levels, according to Bank of America.

Many segments of the economy seem to be in the final stages of returning to their pre-pandemic cadence. The job market is notable in this light. Various job market measures have shown signs of slowing from what had been unsustainably strong levels.

The number of job openings across the economy have been declining, but remain well ahead of pre-pandemic levels, according to the Labor Department. Meanwhile, the number of people signing up for unemployment insurance (relative to total employment) remains at the lowest levels since the 1960s.

The unemployment rate also ticked up to 4.0% in May, its highest rate since January 2022. However, the increase has been at least partially due to the continuing flow of people back into the workforce. 

Lower government spending … eventually

Weaker spending by state and local governments could act as a temporary drag on growth in the fourth quarter. The federal government passed three major stimulus bills over the last few years. The bills included added funding for state and local municipalities, some of which was “use it or lose it” with a deadline of September 2024.

Unfortunately, there’s no federal database to track the value of what remains outstanding and still available. In other words, real GDP may see a temporary boost from stronger state and local spending in Q3 followed by a drop-off in Q4. 

Inflation still easing but at a modest pace

Meanwhile, the inflation picture continues to improve but progress toward returning it to its pre-pandemic averages of just under 2% has slowed in recent months. Headline inflation, as measured by the Labor Department’s Consumer Price Index (CPI) ended the month of May at a still-elevated rate of +3.3%. The Federal Reserve’s preferred measure, the Core Personal Consumption Expenditure Price Index, however, was at +2.6%.  

Rates saw some upward pressure early in the year from seasonal adjustment factors and we believe pressures should slowly ease in the months ahead. Overall, we project that more favorable year-ago comparisons should allow inflation to fall at a faster pace in the second half and we currently project a year-ending rate of +2.5%. If inflation does fall more rapidly in the latter half of the year, it should enable Federal Reserve officials to begin lowering their overnight lending rate, the fed funds rate, beginning with its September monetary policy meeting.

Although market-based rates, such as Treasury, mortgage and auto loan interest rates should not be expected to see a similar pace of decline, we believe they should nonetheless decline modestly as officials slowly implement an interest rate-cutting cycle.

Election impact

Finally, we do not foresee the U.S. presidential election in early November as likely to impact near-term economic activity. Financial markets may gyrate on the prospect of various candidate’s proposals but, at least until a new president is sworn in and a new Congress seated, government tax rates and spending levels should remain status quo.

Bottom line

Economic growth slowed somewhat in the first half of 2024, particularly for consumer spending, but a more moderate pace should further help reduce inflation pressures. As we look to the second half of the year, we believe economic growth should remain modest and inflation should continue to migrate back toward its pre-pandemic levels of about 2%.

Check in with your financial advisor

If you haven’t met with your financial advisor yet in 2024, consider reaching out to them now. The middle of the year is a good time to review your investment portfolio and evaluate your financial goals.