July 23, 2024
(The quarterly Gross Domestic Product (GDP) is scheduled for release by the Bureau of Economic Analysis on Thursday, July 25th at 8:30 AM Eastern Time.)
GDP growth is likely to be close to 2.5 percent, from its level of $28,269 billion in the first quarter. Consumption and investment are both continuing to grow at a moderate pace, accounting for the overwhelming majority of GDP growth in the quarter. After being a large negative in GDP in the last two quarters, inventories are almost certain to be a net positive in the second quarter. The trade deficit continued to expand through April and May so net exports will be a negative factor in the quarter.
On the inflation side, we should see continued slowing. The annualized rate of inflation in the Personal Consumption Expenditure (PCE) Deflator for the quarter should be close to 2.4 percent, with the core index coming in at roughly the same pace. This would be roughly the same as the year-over-year (YOY) rate of inflation in both indexes. That compares to a 2.6 percent YOY rate in the overall PCE and a 2.9 percent rate for the core in the first quarter. The inflation rate is closing in on the Fed’s 2.0 percent target.
Growth and Productivity
The weak 1.4 percent GDP growth in the first quarter led to productivity growth at just a 0.2 percent annual rate. However, this followed three very strong quarters, so the YOY increase was still 2.9 percent. If GDP ends up being close to 2.5 percent, with the index of aggregate hours rising at a 1.6 percent rate, productivity growth will be near 1.0 percent for the quarter.
That would be substantially better than the first quarter pace, but not really pointing to an acceleration of growth. A positive in this area is that the jobs data in the Quarterly Census of Employment and Wages (QCEW) have been showing considerably slower employment growth than the Current Employment Situation, which is the primary basis for hours when calculating productivity. The CES will ultimately be revised in line with the jobs data in the QCEW. If this revision leads to a downward revision in job growth it will mean an upward revision to productivity growth.
Modest Consumption Growth, Continuing Shift Back to Services
Consumption grew at just a 1.5 percent annual rate in the first quarter, adding 0.98 percentage points to GDP growth in the quarter. We are likely to see a somewhat more rapid rate of growth in the second quarter as the first quarter’s numbers were depressed by a sharp falloff in car sales.
We continue to see service consumption outpacing goods consumption, with consumption of services rising at a 3.3 percent rate in the first quarter, although the service share is still below the pre-pandemic level. Consumption of services will likely increase at a slightly slower pace in the second quarter.
The path of health care services will be important to watch. Spending in this category fell sharply during the pandemic (people stopped seeing doctors and dentists for normal care). It has not yet recovered to its pre-pandemic share although in recent quarters it has been outpacing overall consumption growth. It is important to note that for most purposes we care about nominal spending on health care, not real spending. People mostly pay for care through insurers or the government, and the distinction between more care on average, and more money for the same care, is not likely to be readily apparent.
Nonresidential Investment Growth Slows as Factory Boom Eases
A boom in factory construction following the passage of the CHIPS Act and Inflation Reduction Act was the leading factor pushing investment in 2023. While factory construction remains very strong, it is not growing further. As a result, the growth in investment in nonresidential structures is likely to be slow for the rest of 2024.
Investment in equipment has been weak for the last year, held down by high interest rates. We are likely to see modest growth in this category in the second quarter.
Investment in intellectual products, led by software, will most likely be the leading component of investment growth this quarter. This is being driven by the boom in investment in developing AI.
Residential Investment Will Be a Small Positive in Growth
Residential investment turned sharply negative after the Fed began raising rates in 2022. This was partly due to a falloff in starts but also the end of the refinancing boom and a big fall in existing home sales. (The sale of an existing home is not counted in GDP, but the commissions and fees associated with the sale are.)
Residential investment grew at a 16.0 percent annual rate in the first quarter, adding 0.59 percentage points to the quarter’s growth. This was almost certainly an anomaly (the biggest factor was the component that included these fees). With the slowing in housing starts now being reflected in a fall in houses under construction, we will at best see a small positive in this category.
Trade Will Again Be a Drag on Growth
After being a big net positive to growth in 2022 and 2023, as consumption switched back from goods to services, trade was a net negative in the first quarter, subtracting 0.65 percentage points from the quarter’s growth. It will likely also be a net negative in the current quarter. Imports have been growing while exports have been largely stagnant. The biggest item in this growth has been capital goods. This is consistent with healthy investment growth.
Inventories Should Add Close to 0.5 Percentage Points to Growth
Inventories were a major drag on growth in the last two quarters, subtracting 0.47 percentage points and 0.42 percentage points, respectively. This corresponded to a sharp slowing in the rate of inventory accumulation. We are likely to see the pace of accumulation return to a more normal rate in the second quarter, which would add a substantial amount to the quarter’s GDP.
Overall Picture: Stable Steady Growth
All the signs point to the second quarter having solid unspectacular growth. If the rate comes in at 2.5 percent, or something close to it, this will be a pace that most economists view as consistent with the economy’s potential rate of growth. Inflation is continuing to slow towards the Fed’s 2.0 percent target, with rents being the biggest factor keeping the rate of inflation elevated. Since we know that marketed rental units are showing considerably lower inflation than the CPI measure, we can be virtually certain that rental inflation will slow much further.
The extraordinary productivity growth numbers reported for 2023 were encouraging, but this may have just been an offset to weakness in 2022. It will be interesting to see if there is any evidence of faster growth in this report.
CEPR produces same-day analyses of government data on employment, GDP, and other topics. Follow @DeanBaker13 on X to get his quick-take analysis of government data immediately upon release.
