US economy shows further signs of slowing under high interest rates
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Personal spending – the main engine of the US economy – grew just 1.5 per cent in the first quarter, down from an initial estimate of 2 per cent.
PHOTO: AFP
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Washington – Wide-ranging economic data illustrates a downshift in United States growth over the first half of 2024 tied to both the US Federal Reserve’s higher-for-longer borrowing costs policy and the sting of lingering inflation.
Personal spending – the main engine of the economy – grew just 1.5 per cent in the first quarter, down from an initial estimate of 2 per cent.
Separate releases on June 27 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 home buying.
“The economy is operating in low gear in the first half of 2024 after above-trend growth in the second half of 2023,” said Comerica Bank chief economist Bill Adams. “Real GDP (gross domestic product) was cool in the first quarter, and the second quarter has seen continued softness in retail sales and housing activity.”
The Atlanta Fed’s GDPNow forecast now pegs second-quarter growth at 2.7 per cent, a downward adjustment from the 3 per cent pencilled in before the June 27 data.
The data highlights how Fed policy that has 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 that the moderation in economic activity will put a further damper on inflation.
Another report on June 27 illustrated the impact of mortgage rates of around 7 per cent on the housing market. The National Association of Realtors index of contract signings for previously owned homes slumped to the lowest level in records going back to 2001.
While monthly figures on June 28 are projected to show a moderate rebound in May personal spending, signs of financial strain suggest cooler growth in the coming months.
After-tax personal income, adjusted for inflation, rose just 1.5 per cent in the first quarter compared with a year earlier – the smallest annual advance since 2022.
Moreover, labour 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. This suggests it is 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 in 2024, Commerce Department figures showed.
Core capital goods shipments, a figure that is used to help calculate equipment investment in the government’s GDP report, decreased by 0.5 per cent, the most in three months.
Domestic producers also face the challenge of a stronger US dollar, which risks depressing export demand. The US currency has climbed in 2024 on expectations that the Fed will keep interest rates higher for longer.
The government’s advance economic indicators report showed that the US merchandise trade gap swelled to US$100.6 billion (S$136.6 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. BLOOMBERG
