Key takeaways
In 2024’s first quarter, the U.S. economy grew at a slower pace than in recent quarters.
The initial estimate of first quarter 2024 economic growth is 1.6% on an annualized basis.
Consumer spending continues to be the U.S. economy’s key driver.
The U.S. economy continued expanding in 2024’s first quarter, but at a more restrained pace than in 2023. The government’s “advance” estimate for first quarter Gross Domestic Product (GDP) growth came in at a 1.6% annualized rate.1 This occurred despite general market expectations that first quarter growth would exceed 2%.2 The factor that’s played the biggest role in fueling 2023’s solid growth pace, consumer spending, continued to be the most important contributor to first quarter growth in 2024.
“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 on goods declined while consumer spending on services grew. However, overall consumer spending growth was slower than in 2023’s fourth quarter. The largest services spending increases occurred in the healthcare, financial services and insurance categories.
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.
“The strong job market is helping consumers maintain spending levels,” notes Haworth. The economy continues to benefit from very low unemployment (3.8% in March)3 and solid job growth. In addition, there are significantly more job openings than there are available workers.4
It’s important to keep in mind that the first quarter’s 1.6% annualized GDP number is only the first estimate. The BEA will update first quarter numbers, based on more complete data, at the end of May and again at the end of June.
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, consumers demand outstripped supply, an inflation surged as a result, peaking at more than 9% over the previous 12-month period in mid-2022.3 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 causing a recession.
“Recent data indicated that consumer spending has softened, but there are still a number of positive economic signals in other data,” 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 have spent sufficiently to keep the economy moving in a positive direction. “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 signaled that rate hikes are likely finished for the current cycle and it may soon shift its focus to cutting short-term interest rates. However, Fed officials have indicated there is no rush to reverse its existing policy and begin cutting rates. “While the Fed initially projected three, 2024 rate cuts,5 it appears more likely that we may see only one or two,” says Haworth. However, the Fed has indicated that it will assess all data to determine its most appropriate next steps. If signs of slower economic growth persist, the Fed may feel compelled to instigate rate cuts more quickly.
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.
“The Federal Reserve has upgraded its own expectations for 2024 GDP growth,” notes Haworth. At its March 2024 meeting, members of the policy-making Federal Open Market Committee updated its projection of 2024 GDP, raising it to 2.1% from 1.4%.5 “Recent data indicated that consumer spending has softened, but there are still a number of positive economic signals in other data,” 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. He points out this could be favorable for investors. “Ongoing consumer demand allows companies enough pricing power to improve revenue and earnings.”
Upward interest rate trends could complicate matters, 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 enjoyed a strong rebound in 2023 following 2022’s bear market, with the benchmark S&P 500 rising more than 26%. In 2024’s first quarter, the S&P 500 Index surpassed its previous all-time high, achieved two years prior.6 Much of the stock market’s strength in 2023 was limited to a narrow group of stocks, primarily in the technology sector. Haworth expects markets to remain “choppy” in the near term but adds if the economy manages to demonstrate ongoing strength in the coming months, that could work to benefit other sectors of the market that are more dependent on favorable economic trends. For example, energy stocks year-to-date, which struggled in 2023, represent one of the top performing sectors within the S&P 500 in 2024.6
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 5.3% in 2020’s first quarter and declined again by 28% in the second quarter. However, it quickly rebounded, growing by 34.8% 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, then 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 less likely 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 Federal Reserve’s Federal Open Market Committee, following its March 2024 meeting, issued its own projection of 2.1% GDP growth for 2024, generally consistent with the growth rate of the prior two years. However, according to the U.S. Bureau of Economic Analysis, first quarter 2024 annualized GDP growth came in at 1.6%.
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