US growth expected to dip, but economy remains robust

As 2024 begins, the U.S. economy appears to have maintained its robust growth from late 2023, with consumers continuing to spend vigorously despite the burden of high interest rates.

This Thursday, the Commerce Department is anticipated to announce that the gross domestic product (GDP)—the broadest measure of economic output—increased at a modest yet solid 2.2% annual rate from January through March, per FactSet’s survey of economists. However, some forecasts, like one from the Federal Reserve Bank of Atlanta, suggest even more robust growth, estimating a 2.7% increase largely driven by a 3.3% rise in consumer spending, which significantly influences overall economic performance.

This rate marks a slowdown from the brisk 3.4% growth recorded from October to December. The deceleration is largely attributed to the impact of elevated borrowing costs for homes, vehicles, and business financing, a consequence of the Federal Reserve’s 11 rate hikes aimed at controlling inflation.

Despite these challenges, the U.S. continues to perform better than other major global economies. The International Monetary Fund predicts that the U.S. economy will grow by 2.7% in 2024, an improvement from 2.5% in the previous year and significantly above the growth rates forecasted for countries like Germany, France, and Japan.

American consumers have been particularly active, supported by substantial savings accumulated during the pandemic. This is evident from the 0.7% increase in retail sales from February to March, a figure nearly double the expected rate. Business investment has also been robust, particularly in sectors like technology and green energy, spurred by federal incentives, although equipment investment has been less vigorous.

International trade, with imports exceeding exports, is expected to have dampened the economic growth in the first quarter. Kristalina Georgieva, the IMF’s managing director, has also noted that while the U.S. economy’s strength is a positive sign, it has complicated efforts to reduce inflation to the Fed’s 2% target. Price pressures have eased since peaking mid-2022 but were exacerbated by global events like Russia’s invasion of Ukraine, which drove up energy and grain prices.

Despite aggressive interest rate hikes by the Fed from March 2022 to July 2023, the U.S. economy has remained resilient, consistently growing at a 2% annual rate over several quarters. Employment figures are also strong, with unemployment rates staying below 4% for over two years—the longest stretch since the 1960s.

Gregory Daco, chief economist at EY, highlights that consumer spending and a healthy job market continue to underpin the U.S. economy. Although inflation has decreased from its June 2022 high of 9.1% to 3.5%, it remains a point of concern and political contention, particularly as it impacts President Joe Biden’s approval ratings and re-election prospects.

While Federal Reserve policymakers initially signaled rate cuts this year, recent indications suggest they might delay these adjustments in response to persistent inflation. Wall Street traders now anticipate that rate reductions might not commence until the Fed’s September meeting.