U.S. GDP growth accelerated in Q2 but PCE inflation moderated

by Abbey Xu

  • In the second quarter of 2024, U.S. GDP expanded at an annualized rate of 2.8%, marking an acceleration from the 1.4% growth observed in the previous quarter. Consumer spending on both goods and services remained robust and equipment investment saw a significant increase. The strength in final domestic demand was partially offset by a wider international trade deficit.
  • Personal consumption in the U.S. maintained its upward trajectory in Q2 (+2.3%) following growth in the prior quarter. Goods spending rebounded by 2.5%, fully reversing the decline (-2.2%) in Q1. Services consumption continued to rise by 2.2% in Q2 after an already strong quarter in Q1.
  • Price pressure showed more signs of relief, consistent with the last two favorable inflation prints. The core PCE deflator (the Federal Reserve’s preferred inflation measure) rose 2.9% at an annualized rate in Q2, down from 3.7% in the previous quarter, indicating a moderation in inflationary pressure.
  • Residential investment declined by 1.4% in Q2 2024, reversing some of the gains from previous quarters and breaking a streak of three consecutive periods of growth. The decline was echoed by weakening trends in both existing home sales and housing starts during the quarter.
  • Business investment in structures dropped by -3.4% in Q2 2024, marking the first decline after six consecutive quarterly growth. This contrasts with equipment investment, which spiked by 11.6% during the same period, mainly driven by the surging investment in transportation and related equipment (+49.8%).
  • In Q2, trade deficit in the U.S. widened further as growth in imports (+6.9%) continued to outpace exports (+2%). More than offsetting that was a large build in inventories.
  • Household income grew by 0.9%, a bit slower than the 1.2% rate in Q1 but consistent with a slowdown in wage growth. The saving rate ticked lower from 3.8% to 3.5% in Q2, and was still well below the average rate of 7.4% during pre-pandemic 2019.
  • Bottom line: The U.S. economy grew at a faster pace in Q2 2024 supported by solid expenditure details. Still, the PCE inflation data has continued to indicate easing price pressures, echoing slowing in CPI inflation in Q2. Elsewhere, the labour market in the U.S. has shown signs of slowing, evidenced by higher unemployment rates and a gradual decrease in employment and wage growth. Strong economic growth is unlikely to be a concern for the Fed long as inflation is slowing and labour market gradually moves into better balance. Contingent on those trends persisting, we expect the Fed will cut interest rates in September.

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