Key takeaways
In 2024’s first quarter, the U.S. economy grew at a slower pace than in recent quarters.
First quarter economic growth is 1.4% on an annualized basis.
Consumer spending continues to be the U.S. economy’s key driver.
Although it continues expanding, the U.S. economy’s pace of growth is slower than the previous three years. Consumer spending is the biggest economic driver, with a strong job market propelling consumers to continue spending. In the final release of first quarter 2024 Gross Domestic Product (GDP), the economy expanded at an annualized rate of 1.4%. That’s slower than 2023’s GDP growth rate of 2.5%., but a slight bump-up from the previous estimate.1
“When you have economic growth at a pace under 2%, that can be considered ‘stall speed,’” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “But we’re still seeing solid consumer activity, which has been the most important factor driving the economy to this point.” According to the U.S. Bureau of Economic Analysis (BEA), first quarter consumer spending grew, but at a slower pace than in 2023’s fourth quarter. The largest services spending increases occurred in the financial services, insurance, and healthcare categories.1 Also contributing to the quarter’s growth were increases in residential and non-residential fixed investment and state and local government spending.
First quarter 2024 economic growth was tempered by decreased federal government spending, declining inventory investment in the wholesale trade and manufacturing sectors, and rising imports, which detract from GDP.1
“Retail sales remain reasonably strong,” notes Haworth “but consumer spending on services is the biggest growth driver.” Consumers are still in a strong position due to very low unemployment (4.0% in May)2 and solid job growth. In addition, there are still more job openings than there are available workers.3
Markets are now anticipating the initial read on second quarter GDP growth, due for release in late July.
The U.S. economy faced unusual challenges in recent years. The onset of the COVID-19 pandemic in 2020 led to a brief but severe recession. As the economy bounced back, consumer demand outstripped supply, and inflation surged as a result, peaking at more than 9% over the previous 12-month period in mid-2022.2 The Federal Reserve (Fed) responded by sharply raising the federal funds target interest rate it controls. While designed to slow economic growth as a way to tame inflation, many analysts feared the Fed's actions, which led to higher interest rates across the economy and markets, would create too many economic headwinds, potentially resulting in a recession.
“Modest, steady economic activity is the path we appear to be on at this point, and there don’t seem to be signs of serious recession risk,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “Nevertheless, a big question that may drive the markets and the timing of Fed rate cuts is whether consumers can continue spending at a sufficient pace to keep the economy growing.”
Yet consumers, buoyed by a strong job market and competitive wage growth, had the means and willingness to spend sufficiently to keep the economy growing. “Consumers may, at times, feel as if they’re through spending, but they haven’t stopped,” says Haworth. Consumers’ wherewithal meant 2023’s GDP grew comparably to pre-2020 growth, a period highlighted by a very different environment of low interest rates and lower inflation.
The Fed held the line on interest rate hikes since July 2023, and has indicated that rate cuts may begin soon. Yet annual inflation has proved stubborn, remaining above the 3% level for 12 consecutive months. “While the Fed initially projected three, 2024 rate cuts,4 it appears more likely that we may see only one or two,” says Haworth. The timing of the start of Fed rate cuts seems far from certain.
Has the Fed managed to achieve what’s referred to as a “soft landing” for the economy, staving off a recession while beating back inflation? The latest data makes it less clear if the economy can maintain its momentum or if the inflation risk is yet fully in check. However, the Fed’s own projection calls for GDP growth of 2.1% this year, slower than in 2023 but an indication that the pace of economic growth is expected to accelerate during the year.
“Modest, steady economic activity is the path we appear to be on at this point, and there don’t seem to be signs of serious recession risk,” says Haworth. “Nevertheless, a big question that may drive the markets and the timing of Fed rate cuts is whether consumers can continue spending at a sufficient pace to keep the economy growing.”
To this point, consumers have held their ground. “Inflation remains somewhat elevated, meaning there is still demand from consumers,” says Haworth. However, there may be ongoing pressures “What surveys are telling us is that price levels are challenging for some consumers, and on top of that, borrowing is expensive as well,” says Haworth. “While that may ultimately impact consumer spending levels, we’re not seeing it yet.”
Stubbornly high interest rate complicate matters for businesses as well, particularly as it relates to business capital investment. “If rates stay elevated or move higher and companies are forced to issue debt with more significant financing costs, that could dampen business activity and threaten current expectations for economic growth,” according to Haworth.
Notably, says Haworth, “GDP is not a primary economic indicator for professional investors. Other data points arrive on a timelier basis that signal the degree to which economic expectations are on track.” However, GDP is ultimately the measure that indicates the overall health of the U.S. economy, which has an impact on the markets.
Equity markets continue a rally that began in October 2022, with the benchmark S&P 500 rising more than 15% in 2024’s first six months, following 2023’s 26% gain.5 All major market indices such as the S&P 500 Index, the Dow Jones Industrial Average and the NASDAQ Composite Index, surpassed previous all-time highs, achieved prior to 2022’s bear market.6 As was the case in 2023, a narrow group of stocks, primarily in the technology sector, have led the markets this year. However, other sectors are playing a bigger role in the market’s positive results this year compared to 2023. Haworth says the combination of ongoing economic growth and persistent inflation make stocks more attractive relative to bonds. Haworth adds if the economy manages to demonstrate ongoing strength in the coming months, that could work to benefit non-technology sectors of the market that are more dependent on favorable economic trends. For example, utility stocks year-to-date, which struggled in 2023, represent one of the top performing sectors within the S&P 500 in 2024.5
Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet the challenges of what continues to be a dynamic market and economic environment.
Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.
The technical definition of a recession is two consecutive quarters of declining Gross Domestic Product (GDP) growth. However, more complex formulas are often used. For example, in 2022, according to the U.S. Bureau of Economic Analysis, GDP declined slightly in the first quarter (-2.0%) and second quarter (-0.6%), but given a low unemployment rate and other favorable factors, this period was not considered an official recession. The accepted arbiter of a recession, the National Bureau of Economic Research, considers a variety of measures to determine a recession’s timing and length.
The most recent recession was an unusual one, related to the start of the COVID-19 pandemic. It lasted only from February through April 2020, one of the shortest recessions on record. But it also was one of the most severe. According to the U.S. Bureau of Economic Analysis, the U.S. economy declined at an annualized rate of 5.3% in 2020’s first quarter and declined again by 28% (annualized) in the second quarter. However, it quickly rebounded, growing by a 34.8% annualized rate in the third quarter. This was an unusual circumstance related to the partial closing of many businesses and schools and the sudden layoff of a number of workers in response to the onset of the pandemic, followed by a rapid reopening for most businesses. The previous recession occurred more than a decade earlier, the so-called Great Recession of 2007-2009. This recession was tied to the financial crisis that rocked the global economy for an extended period.
While it is difficult to predict a recession in advance, the current state of the economy makes the possibility of a recession appear more remote in 2024. “It seems likely the economy may avoid a recession in the near term, though we can expect that real GDP growth will remain modest over time,” says Matt Schoeppner, senior economist at U.S. Bank. “It might qualify as what we call a ‘growth recession,’ where we see a slow economy, but with few ramifications for the job market.” The initial read of 2024 economic growth was positive, though slower than recent experience. According to the U.S. Bureau of Economic Analysis, first quarter 2024 annualized GDP growth came in at 1.6%, slightly behind 2023’s 2.5% growth rate, but still representing an expanding economy.1
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