According to reports, extensive economic data shows that the US economy slowed down in the first half of this year due to the Federal Reserve's policy of maintaining higher borrowing costs in the longer term and stubborn inflation.
Official data shows that in the first quarter of this year, although the annualized quarterly GDP rate in the United States ultimately rose to 1.4%, slightly higher than the previously estimated 1.3%. But the report sounded the alarm for a significant slowdown in consumption - personal spending, the main engine of the US economy, fell by 0.5 percentage points, equivalent to an annualized rate of 1.5%.
Other data released on Thursday also showed a decrease in orders and shipments of certain commercial equipment, the largest trade deficit in two years, a weak job market, and a decline in home buying activity.
"After experiencing above trend growth in the second half of 2023, the US economy was operating at a slow pace in the first half of 2024. Real GDP cooled in the first quarter, while retail sales and real estate activity continued to weaken in the second quarter," said Bill Adams, Chief Economist of Comerica Bank in a report
The Atlanta Federal Reserve's GDP Now forecast for the second quarter of the United States is 2.7%, down from the 3% forecast before Thursday's data release.
LPL Financial's Chief Economist Jeffrey Roach pointed out that "fixed investment in housing is stronger than initially reported, with a month on month growth of 16%, contributing approximately 0.6% to the overall GDP growth of 1.4% in the first quarter. However, consumer spending has been lowered again, indicating that the trend of consumer spending for the rest of this year seems to be more sluggish."
Previously, the New York Federal Reserve's Quarterly Report on Household Debt and Credit showed that the total amount of US household debt in the first quarter rose to $17.7 trillion, once again breaking a record high. In addition, about 6.9% of credit card loans are in serious arrears (with arrears exceeding 90 days), up from 4.6% in the same period last year, the highest level since 2012.
In addition, another report released on Thursday showed the impact of mortgage interest rates of around 7% on the real estate market. The National Association of Realtors stated that the second-hand housing contract index has fallen to its lowest level since records began in 2001.
Labor market cracks
Although the monthly data to be released on Friday is expected to show a mild rebound in personal spending in May, signs of tight funds indicate that growth will cool down in the coming months. After adjusting for inflation factors, personal after tax income in the first quarter only increased by 1.5% year-on-year, which is the smallest year-on-year increase since 2022.
In addition, labor demand, the main source of income growth, is slowing down. The number of people continuing to apply for unemployment benefits has climbed to the highest level since 2021, indicating that unemployed Americans need more time to find another job.
In fact, economists from Goldman Sachs recently reported that the US labor market is at a "turning point". They pointed out that the strength of labor demand is not yet clear, and in sharp contrast to healthy non-agricultural employment data, the number of initial and continuing claims for unemployment benefits has been increasing in recent weeks.
"Ultimately, the key driving factor for labor demand is economic activity, and GDP growth has significantly slowed down," they wrote, predicting that the recent economic slowdown is likely to continue.
Corporate pressure
At the same time, companies are also feeling the pressure of rising borrowing costs. According to data from the US Department of Commerce, the amount of core capital goods orders has equaled the largest decline since the beginning of this year. Core capital orders refer to equipment investments other than aircraft and military hardware; The shipment volume of core capital goods used to help calculate equipment investment in the government's GDP report decreased by 0.5% month on month, the largest decline in three months.
In addition, domestic producers are also facing the challenge of a stronger US dollar, which may suppress export demand. Due to expectations that the Federal Reserve will maintain high interest rates for a longer period of time, the US dollar has already climbed this year.
The US government's leading economic indicator report shows that the US commodity trade deficit widened to $100.6 billion in May, the largest in two years, while exports declined. The report also shows an increase in inventory among wholesalers and retailers, which will help alleviate the impact of the widening trade deficit on GDP in the second quarter.
The reasons for interest rate cuts are becoming more comprehensive
Analysis suggests that these data highlight how the Federal Reserve's high interest rates have eased demand by raising various borrowing costs from consumer goods, home purchases, to commercial equipment. Officials hope that the slowdown in economic activity will further curb inflation. But the long-term impact of high interest rates on businesses and residents has put the Federal Reserve in a dilemma when considering the timing of interest rate cuts.
LPL Financial's Roche said that the latest US Q1 economic growth report should prompt the Federal Reserve to start cutting interest rates later this year.
He said, "We expect both consumer and business activities to slow down in the second half of 2024, which will provide ample reason for the Federal Reserve to start cutting interest rates later this year."
In previous reports, Goldman Sachs also emphasized its confidence in the Fed's forecast of two rate cuts this year (in September and December).
"There is still a possibility of two rate cuts this year, expected to start as early as September, but Federal Reserve officials need data to comply and enhance confidence in rate cuts," said Kathy Bostjanic, Chief Economist at Nationwide Mutual Insurance Co. "Conservatism is understandable. They lean towards conservatism, and I think the door is still open."