Notes on the Economy – Q2 2024 Summary  

Domestic demand for goods and services was stronger than GDP. Real final sales to domestic purchasers grew an annualized 2.8%. Consumer spending provided the main fuel, advancing an annualized 2.5% and accounting for 1.7 percentage points of the real GDP growth rate. The main impediments to growth were inventories and net exports, which together cut 1.2 percentage points from real GDP growth. Meanwhile, consumer price inflation has flatlined above the Fed’s 2.0% target, and interest rates are stuck at a high level.  

During early 2024, international economic growth rates have been diverse, but overall global growth has stabilized. Global real GDP grew 3.2% in 2023 and appears to be on track for similar growth in both 2024 and 2025, according to the International Monetary Fund (IMF). 

HEADLINES – WHAT’S IMPORTANT  

1. Inflation Is Still Headed Down – Stickiness in wages and rents have slowed the decline of inflation, but both are on a downward path. The labor market is softening and rental vacancies are rising.
2. Interest Rates Are Frozen – Fed policymakers anticipate holding rates steady until labor markets weaken notably and/or disinflation speeds up, but they view the prospect of raising rates as remote.
3. Longer-Term Bond Issues Are Still Good Bets – High-quality, longer-term bonds pay decent interest, even if the Fed takes longer to lower interest rates and produce capital gains.  
4. Equities Values Are Stretched, Correction Risks Are High and Rising – Look for opportunities to trim risky and expensive holdings if markets run up materially. Only consider additions on substantial corrections. 

LOOKING AHEAD  

Between mid-March 2022 and the end of July 2023, the Fed raised the target range for the federal funds rate 525 basis points. Since then, it has kept the target at 5.25% – 5.50%. Fed policymakers appear to be doubling down on their efforts to bring inflation down to their 2.0% target. Policymakers have indicated that they anticipate holding rates at that level for a longer period than the general public and participants in the financial markets anticipate. As has been pointed out in previous publications of these Notes, monetary policy works with long and variable lags. However, since the federal funds rate has already been maintained at its peak for nearly ten months, it is highly likely that the negative impact on growth will be quite noticeable in 2024 or the first half of 2025. 

Signs that may be considered precursors to a substantial slowdown or recession keep popping up. Some examples: growth in total bank lending has come to a halt, unemployment is on an upward track, and job vacancies are falling along with voluntary quits. Consumer credit card debt is rising rapidly, and credit card delinquencies are near a 13-year high. Home sales and starts are trending down. Growth of capital spending on business structures and equipment has stalled. Total business inventories appear to be bloated. Maybe Godot will show up after all. AMG anticipates real GDP growth will slow to less than a 1.0% annualized rate by the second half of 2024. 

Global real GDP growth slowed from 6.5% in 2021 to 3.5% in 2022. Anti-inflation economic policies were conducted in many countries in order to reduce the surging demand and intense upward pressure on prices that occurred in the aftermath of the COVID-19 pandemic. Subsequent easing of restrictive policies and a catchup in consumption and investment aligned growth close to pre-pandemic norms in 2022. Such growth was largely maintained in 2023. The IMF projects economic growth of 3.2% in 2024 for the global economy, including 1.8% for developed economies and 4.2% for emerging and developing economies, with lagging performance from China offset by resilience in other economies.