The U.S. economy demonstrated robust growth in the second quarter of 2024, with the gross domestic product (GDP) expanding at an annualized rate of 2.8% GDP Growth in Q2, according to the advance estimate released by the Bureau of Economic Analysis (BEA). This figure surpassed economists' expectations of a 2.1% increase, signaling the economy's resilience amid elevated interest rates and global economic challenges.
Consumer Spending Drives Economic Expansion
The second quarter's growth was primarily driven by strong consumer spending, which accounts for roughly two-thirds of the U.S. economy.
Despite concerns about softening consumer spending due to rising unemployment rates, households continued to support economic growth. Business investment and government spending also contributed to the GDP expansion.
However, the housing sector experienced a slowdown, with a decline in home construction and residential investments dragging down economic growth. This contrasts with the solid growth observed in this sector over the previous three quarters.
Fed Signals Potential Rate Cuts as Economy Cools
Economists view the gradual cooldown as a welcome development, as it helps alleviate inflationary pressures that have persisted since the rapid post-pandemic recovery.
The Federal Reserve has maintained interest rates at a two-decade high since last summer but is expected to start cutting rates as early as September. Fed Chair Jerome H. Powell recently acknowledged that the U.S. is “no longer an overheated economy” and that conditions have returned to a strong but not overheated state.
Despite the overall positive outlook, some sectors, such as housing and construction, have experienced more significant setbacks.
For example, Sarah Henry, owner of Gasper's Construction in Seattle, reported a 30% drop in new business over the past year due to clients pulling back on home equity lines of credit in response to higher interest rates. Nevertheless, Henry remains optimistic, citing the resilience of the Seattle housing market and the potential for interest rates to ease in the coming months.
Economic Outlook: Moderation Expected Through 2025
Looking ahead, economists predict that GDP growth will continue to moderate through the second half of 2024 and into early 2025. Deloitte's baseline scenario forecasts consumer spending to rise 2.3% in 2024, up from 2.2% in 2023, while business investment is expected to increase by 3%, down from 4.5% last year. Government spending is projected to rise by 2.5%.
Inflation and Government Borrowing Costs Remain Elevated
Inflation remains a concern, with the Consumer Price Index (CPI) staying above the 3% threshold for the second quarter. The federal deficit relative to GDP is expected to hover around 5.6% in the outer years of the forecast period, and borrowing costs for the federal government are projected to remain elevated, fluctuating between 4.2% and 4.5%.
U.S. Economy Demonstrates Resilience Amid Challenges
The U.S. economy's 2.8% growth in the second quarter of 2024 demonstrates its resilience and strength, driven primarily by consumer spending.
While some sectors face challenges, and the economy is expected to slow down in the coming quarters, the overall outlook remains positive. Policymakers and economists will closely monitor inflation, labor market dynamics, and global economic conditions to ensure a sustainable and balanced growth trajectory.
