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  • Writer's pictureEric Puckett

Economic Outlook | Spring 2024

The U.S. economy is, seemingly, on strong footing. Gross domestic product (GDP) grew by 3.2% in the fourth quarter of 2023 and is estimated to have grown 2.9% in the first quarter of this year.1 Meanwhile, though inflation has been retreating since its peak in 2022, March data showed an unexpectedly higher rate of inflation at 3.5% year over year.2 This added further uncertainty about the future of interest rates. Interestingly, while consumer spending has held strong, consumer sentiment about inflation and the U.S. economy dipped slightly in April, and concern about the future remains.3

 


How is the U.S. economy doing?

 

Consumer spending accounts for 70% of GDP, meaning that as goes the U.S. consumer so too does GDP. As a reminder, GDP is the sum of all output generated within the borders of a country. When GDP grows, it means that not only has production of these goods and services increased, but consumption has increased, as well.4 The resilience and grit of the U.S. consumer cannot be overstated. Despite rising interest rates and inflationary pressure, U.S. GDP continues to not only grow, but grow at a substantially higher clip than other advanced economies around the world.

 

It is worth mentioning that the U.S. can use its robust economy and the dollar’s position as the reserve currency of the world to meaningfully influence economic expansion and contraction around the world. The Federal Reserve published a paper in 2018 on an empirical study of 50 foreign advanced and emerging economies. The study showed that the impact of a 1% interest rate increase by the U.S. Federal Reserve reduced economic growth in all 50 countries almost equally to the United States itself, on average.5

 

What is happening with inflation?

 

While inflation has subsided since its peak in 2022, it has remained elevated above the Fed’s target rate of 2%. At the end of 2023, many analysts were betting on five separate interest rate reductions starting in March of 2024. This has not happened. At the writing of this outlook, higher than expected retail sales figures took the market by surprise, indicating that interest rates and higher prices don’t seem to be impacting the U.S. consumer as much as originally expected. This looks to be true for the U.S. economy, as well. Analysts are now questioning whether even one rate decrease is a possibility in 2024.6

 

This begs the question, “How did so many analysts get this wrong?” It can be partially answered through the inverted yield curve which has become the economic “boy who cried wolf.” Historically, when the short end of the yield curve is higher than the long end, it is a signal that a recessionary environment looms ahead. However, two-thirds of analysts polled now believe the yield curve has become an unreliable economic indicator.6

 

The perceived unreliability of the currently inverted yield curve may be due to the change in behavior it precipitated. The yield curve has been inverted for 20 months. In response to this classic signal of a coming recession, corporations and banks tend to become more conservative. They will generally hold more cash, slow hiring or even pair back the corporate work force, and banks will often tighten lending standards. It may likely have been these changes in behavior that helped stave off a recession up to this point. 7

 

What does the future hold?

 

It appears that the buying desires of U.S. consumers are not going to be suppressed anytime soon. Many consumers benefitted from the tight labor market and saw a beneficial increase to their wages at that time, though wage growth has since leveled out. Beyond the concerns of global crisis and a contentious political season looming in 2024, consumers look resilient and philosophically resolved to continue shopping, vacationing, and enjoying the benefits of their money. The current economic environment may remain intact for some time.

 

 

 

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