Economic growth held in low gear in the second quarter of 2024 after a slow first quarter. Many Americans received smaller tax refunds this spring after stock market gains in 2023 increased bills for capital gains tax. That weighed on sales of used cars and other durable goods this spring. Housing starts fell in the second quarter, especially multifamily starts. And low- and moderate-income consumers reined in discretionary spending in response to cost of living pressures, a headwind to the restaurant industry and retailers targeting the mass market.
At the same time, affluent households spent openhandedly on travel, entertainment, and other experiences, lifting foot traffic at airport security checkpoints to the highest since the pandemic. Considering this mix of headwinds and tailwinds, real GDP likely registered an increase of below 2% annualized in the second quarter of 2024 after 1.4% annualized in the first, both down from the second half of 2023’s 3.8% annualized growth.
The labor market cooled further amid this more measured output growth. Nonfarm payrolls rose 177,000 per month in the second quarter, the slowest increase since the spring of 2020. The unemployment rate rose to 4.1% in June, the highest since late 2021. And average hourly earnings growth in June tied for the slowest year-over-year increase since mid-2021. The red-hot job market of late 2021 through early 2023 is a thing of the past.
Most importantly for the Fed, inflation moved toward the Fed’s target in the second quarter after running hot in the first quarter. Annual CPI inflation slowed to 3.0% in June and tied for the lowest since the first half of 2021, while core CPI excluding food and energy at 3.3% was outright the lowest since then. The Fed is pleased to see inflation coming down. With the economy growing in low gear, they are less concerned about domestic wage-price effects fueling a rebound in inflation.
The Fed thinks the time to start cutting interest rates is getting close, but they are not convinced it is here quite yet. Comerica forecasts for the Fed to hold the federal funds target unchanged at their July 31 decision, then cut it a quarter percentage point at the following decision September 18. A second cut before year-end is likely at the December 18 decision.
Comerica’s forecast anticipates quarterly rate cuts continuing in 2025. The Fed slowed the pace of balance sheet run-off to a monthly limit of $60 billion in June, down from $95 billion previously, and will likely end balance sheet run-off in the first half of 2025 when the balance sheet falls to between $6.6 trillion and $6.9 trillion dollars, down from $7.3 trillion in mid-2024.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.
