U.S. Economy Shows Further Signs of Slowing
The lowest annualized inflation since 2022 suggests high interest rates are finally starting to work.
Wide-ranging economic data illustrates a downshift in U.S. growth over the first half of the year tied to both the Federal Reserve’s higher-for-longer borrowing costs policy and sting of lingering inflation.
The government marked down the rate of growth in personal spending—the main engine of the economy—by half a percentage point, to an annualized 1.5 percent in the first quarter. Separate releases on Thursday showed declines in orders and shipments of certain business equipment, the widest trade deficit in two years, weakness in the job market, and a slide in homebuying.
“The economy is operating in low gear in the first half of 2024 after above-trend growth in the second half of 2023,” Bill Adams, chief economist at Comerica Bank, said in a note. “Real GDP was cool in the first quarter, and the second quarter has seen continued softness in retail sales and housing activity.”
| Indicator | Latest | Prior Period |
|---|---|---|
| Personal consumption (QoQ, SAAR) | +1.5% | +3.3% |
| Core capital goods orders (month-over-month) | -0.6% | +0.3% |
| Core capital goods shipments (month-over-month) | -0.5% | +0.4% |
| Change in pending home sales (month-over-month) | -2.1% | -7.7% |
| Continuing jobless claims | 1.84 million | 1.82 million |
| Merchandise trade balance | -$100.6 billion | -$98 billion |
The Atlanta Fed’s GDPNow forecast now pegs second-quarter growth at 2.7 percent, a downward adjustment from the 3 percent penciled in before Thursday’s data.
The data highlight how Fed policy that’s kept interest rates at a two-decade high is tempering demand by making borrowing more expensive for everything from consumer goods to home purchases to business equipment. Officials are hoping the moderation in economic activity will put a further damper on inflation.
Another report on Thursday illustrated the impact on the housing market of the current mortgage rates around 7 percent. The National Association of Realtors index of contract signings for previously owned homes slumped to the lowest level in records back to 2001.
While monthly figures on Friday are projected to show a moderate rebound in May personal spending, signs of financial strain suggest cooler growth in coming months. After-tax personal income, adjusted for inflation, rose just 1.5 percent in the first quarter compared with a year earlier—the smallest annual advance since 2022.
Moreover, labor demand—the main source of the income growth that fuels spending—is moderating. Continuing jobless claims, a proxy for the number of people receiving unemployment benefits, climbed to the highest level since 2021. That suggests it’s taking longer for out-of-work Americans to find another job.
Businesses are also feeling the pinch of elevated borrowing costs. The value of core capital goods orders, a proxy for investment in equipment excluding aircraft and military hardware, matched the biggest drop this year, Commerce Department figures showed.
Core capital goods shipments, a figure that is used to help calculate equipment investment in the government’s gross domestic product (GDP) report, decreased 0.5 percent, the most in three months.
Domestic producers also face the challenge of a stronger U.S. dollar, which risks depressing export demand. The U.S. currency has climbed this year on expectations the Fed will keep interest rates higher for longer.
The government’s advance economic indicators report showed the U.S. merchandise trade gap swelled to $100.6 billion in May—the widest in two years—as exports dropped. At the same time, the report also showed increases in inventories at wholesalers and retailers, which will help blunt the impact on second-quarter GDP from the wider trade deficit.
Copyright 2024 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.