AMSCI NEWSLETTER July/August 2024

The U.S. economy exceeded expectations in the second quarter, growing at an annualized rate of 2.8 percent.

“The increase in real GDP primarily reflected increases in consumer spending, private inventory investment, and nonresidential fixed investment,” the Bureau of Economic Analysis, a division of the Department of Commerce, reported on July 25. “Imports, which are a subtraction in the calculation of GDP, increased.”

Economists, on average, had expected GDP to grow by 2.1 percent.

Consumer spending accounts for more than two-thirds of the country’s economic activity, and the bureau explained that the growth in that category “reflected increases in both services and goods. Within services, the leading contributors were health care, housing and utilities, and recreation services. Within goods, the leading contributors were motor vehicles and parts, recreational goods and vehicles, furnishings and durable household equipment, and gasoline and other energy goods.”

The April to June expansion followed 1.4 percent growth in the first quarter.

The personal consumption expenditures price index, a measure of inflation, increased by 2.6 percent, down from 3.4 percent in Q1. The Federal Reserve’s target inflation rate is 2 percent, so this data could make interest rate reductions more likely.

“This is a perfect report for the Fed,” the head of economic research at Fitch Ratings said, according to The Guardian. “Growth during the first half of the year is not too hot, inflation continues to cool and the elusive soft landing scenario looks within reach.”

The Federal Reserve’s Federal Open Market Committee (FOMC) is scheduled to meet July 30-31 and while a drop in interest rates is seen as unlikely at that meeting, a reduction at its next meeting on Sept. 17-18 is now regarded is likely, with potentially one more cut before the end of the year.

“Clearly the ongoing disinflation process is occurring,” Citi’s global chief economist said, according to Barron’s. “And that is very encouraging for the Fed.”

A Reuters poll conducted before the second quarter economic data was announced found that “Nearly three-quarters of economists – 73 of 100 – predicted two 25- basis-point cuts this year, more than the roughly 60% who took that view in the June survey. Seventy of the economists in the latest poll said the cuts would happen in September and December.”

Multiple measures of inflation and the overall economy are used by the Federal Reserve and Reuters also reported that, in mid-July, Fed Chair Jerome Powell said, “In the second quarter, actually, we did make some more progress” on containing inflation, adding, “We’ve had three better readings, and if you average them, that’s a pretty good place.”

Another member of the FOMC, Christopher Waller, told CNN after the Q2 numbers were released that “Current data are consistent with achieving a soft landing. … While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.”

The target range for the Federal Reserve’s Federal Funds Rate has been 5.25 to 5.5 percent since July 2023. The last time the Fed reduced rates was in March 2020 in response to the economic emergency created by the Covid-19 pandemic. The target range was 0 to 0.25 percent for the next two years, until concerns about inflation led to a series of hikes over the following 16 months.

The economy continues to add a significant number of jobs each month – including 206,000 in June – and the unemployment rate is 4.1 percent, according to the Bureau of Labor Statistics, a part of the Department of Labor. The bureau noted job gains in government, health care, social assistance and construction.

With low unemployment, consumer confidence appears to be largely holding steady. The Conference Board’s Consumer Confidence Index dipped less a percentage point from May to June, through the organization’s chief economist noted that it “remained within the same narrow range that’s held throughout the past two years, as strength in current labor market views continued to outweigh concerns about the future.”

The Index of Consumer Sentiment from the University of Michigan’s Surveys of Consumers slid 2.6 percent from June to July, a change that the surveys’ director said was “statistically insignificant” and “well below the margin of error.”

“Labor market expectations remain relatively stable, providing continued support to consumer spending,” the director said. “However, continued election uncertainty is likely to generate volatility in economic attitudes in the months ahead.”

Confidence in the manufacturing sector remains shaky, as the Institute for Supply Management’s Purchasing Managers Index in June decreased (by a small amount) for the fourth straight month. In addition, it was at a level indicating contraction in the sector for the third consecutive month.

“Demand remains subdued, as companies demonstrate an unwillingness to invest in capital and inventory due to current monetary policy and other conditions,” the chair of the group’s Manufacturing Business Survey Committee said. “Production execution was down compared to the previous month, likely causing revenue declines, putting pressure on profitability.”

Housing starts increased 3 percent from May to June, but were 4.4 percent below June 2023, the Census Bureau and the Department of Housing and Urban Development reported.

Existing home sales declined 5.4 percent from May to June, as the median sales price reached an all-time high of $426,900, according to the National Association of Realtors.

“We’re seeing a slow shift from a seller’s market to a buyer’s market,” the association’s chief economist said. “Homes are sitting on the market a bit longer, and sellers are receiving fewer offers. More buyers are insisting on home inspections and appraisals, and inventory is definitively rising on a national basis.”

The Dow Jones Industrial Average closed at 40,589.34 on July 26, up 7.7 percent on the year. The S&P 500 Index ended the day at 5,459.10, for a year-to-date gain of 14.5 percent.

The dollar on July 26 was trading at 0.92 euros, 0.78 pounds, 153.83 yen and 7.25 yuan.