Kiplinger GDP Outlook: Economic Growth Will Slow as Consumers Rebuild Savings
Q2 GDP growth surprises to the upside, but the economy is likely to downshift to 2.0% quarterly growth for the rest of the year.
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Second-quarter GDP growth came in at a strong 3.0%, a bounce-back from 1.3% in the first quarter. Decent consumer spending in the second quarter was helped by a partial reversal of the first quarter’s motor vehicle sales slump. Businesses also added to their vehicle purchases. A reversal in business accumulation of inventories added 0.8 percentage points to growth, as businesses became more confident that a serious economic slowdown isn’t happening. Exports grew slightly, and federal defense and state and local government spending added to growth, as well. Corporate profits grew, reversing the first quarter’s decline.
But future economic growth is likely to be slower. Consumers have been
reducing their savings in order to spend. The savings rate was just 2.9% in July,
down from 3.5% in April, and is likely to rise over the next 12 months, which will cut
into spending. Gains in consumer purchases of services have begun to slow as they
become more cautious about their finances. The second quarter’s jumps in consumer purchases of home furnishings, business purchases of motor vehicles and federal defense spending were likely one-offs. Overall business spending is likely to stay at the current modest pace because of high interest rates and tight bank lending standards.
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There aren’t likely to be jumps in housing and commercial or office construction, for now. Import growth is far outstripping export growth, meaning that more of U.S. consumer spending is going to support weaker economies overseas. State and local government spending will start to slow as their post-pandemic hiring spree diminishes and their staffing approaches normal levels.
Quarterly growth in the third and fourth quarters is likely to be around 2.0%. 2.0% is not too bad; in fact, it is about the economy’s potential growth rate over the long run. Long-run growth potential is determined by the sum of productivity growth and labor force growth, and those two factors point to a roughly 2% long-term pattern for GDP.
Yearly average GDP growth for 2024 will be 2.6%, a bit higher than in 2023, but will then slow down to 2.0% in 2025.
Source: Department of Commerce: GDP Data
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David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.
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