Kiplinger's GDP Outlook: Economic Growth Slows to Normal

Kiplinger’s Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or to subscribe for the latest trends and forecasts from our highly experienced Kiplinger Letter team.

First-quarter GDP growth of 1.6% isn’t as bad as it looks.
First, the economy had exceeded its speed limit in the third and fourth quarters last year, so a slowing was expected. Goods spending, for example, had been on a tear and couldn’t keep up that pace for long. Second, most of the reason for the slowdown from the fourth quarter’s 3.4% GDP expansion was that imports picked up, which happens when domestic demand is strong. In fact, domestic demand grew 2.8% in the first quarter, down only a little from 3.6% the previous quarter. When imports rise, that subtracts from GDP growth. Finally, we expected that economic growth would slow to a more normal rate, which is about 2%. The economy’s potential growth rate in the long run is dependent on productivity growth and labor force growth, and those two factors point to a roughly 2% long-term growth pattern.

Consumer purchases of services picked up in the first quarter, rising at a 4% clip. Home construction grew strongly, while business purchases of equipment rose for the first time after two down quarters. There was some pullback: Spending on business structures was unchanged after a year of strong growth, and businesses cut back additions to their inventories of goods. Business spending will likely stay at the current modest rate because of high interest rates and tight bank lending standards. 

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Federal government spending also was nearly unchanged. Federal outlays are expected to gradually ebb, as previous spending programs funded by Congress run their course. State and local governments have been hiring because they are still catching up after the pandemic, but they will start to cut back as their staffing approaches normal levels.

Hot inflation in the first quarter will likely delay interest rate cuts that the Federal Reserve might be contemplating. The Fed has been focusing on the Personal Consumption Expenditures price deflator, excluding food and energy, more than the Consumer Price Index (CPI), but this alternate price measure has simply confirmed the CPI’s elevated recent readings. 

Yearly average GDP growth for 2024 will be 2.5%, the same as in 2023, but will then slow down to 1.9% in 2025. 

Source: Department of Commerce: GDP Data

Read more

• When is the Next Fed Meeting?
• Kiplinger's Jobs Forecast
• Kiplinger's Housing Forecast
• Kiplinger's Business Spending Forecast