Can Consumer Spending Save The Day?

As the second quarter draws to a close, two key economic questions loom. First, will growth continue to moderate from the torrid pace of the second half of 2023? Second, will this moderation be enough to materially slow inflation growth toward the Fed’s 2% target?  If so, will this scenario require notable cooling of the labor market (i.e., higher unemployment)?

Looking back to 2023, GDP growth averaged an annualized 4% pace in the second half of the year, more than double what the Fed currently considers the economy’s long-run potential growth rate. If excluding the more volatile categories of inventories and trade, real domestic demand averaged approximately 3.5% annualized growth during that timeframe. This was the result of strong consumer spending and hefty government outlays, not to mention solid contributions from the housing sector.

In the first quarter of 2024, annualized GDP growth slowed to 1.3%, according to the most recent estimate, but real domestic demand was still a solid 2.5%. Moderation in final demand is expected to continue in the second quarter, but anything higher than 2% is still above trend growth estimates for the economy.

Based on recent projections, the Fed seems to be optimistic that inflation might return to 2% with little or no economic pain — a soft landing. But if the central bank has to restrict interest rate policy for a longer timeframe to achieve its price stability objective, then the risk of greater economic deterioration increases. This would ultimately be good for the inflation battle, but it could also cause increased unemployment and credit delinquencies.

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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

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