Economy Statement by Eric Van Nostrand, performing duties of Assistant Secretary for Economic Policy for the Treasury Borrowing Advisory Committee

July 29, 2024 / Source: Treasury

Introduction

Throughout the second quarter of 2024, U.S. economic data continued to show robust growth in output and labor markets, even as inflation slowed further. Headline GDP growth accelerated to 2.8 percent over the past three months, supported by strong underlying demand from household consumption and business investment.  Although the pace of job growth moderated somewhat relative to previous years, it remains historically healthy, and the unemployment rate remains low.  Moreover, more Americans continue to enter the labor force, and the share of workers aged 25 to 54 rose to its highest level of the labor force in over two decades—contributing to the supply-side expansion that has strengthened U.S. growth since the pandemic.

Meanwhile, inflation continued to slow in the second quarter. While core inflation remains somewhat elevated, critical prices pressures have moderated—particularly housing rental prices, which have lifted core inflation in previous years.  In addition, price growth for core services excluding rent of housing decelerated markedly as lower airfares largely offset higher prices for medical care and motor vehicle insurance, maintenance, and repair.

Although further moderation is needed before core inflation is consistent with the Federal Reserve’s target, the data remain consistent with the path to a soft landing.  At the same time, the Biden-Harris Administration continues to focus on its investments to grow the economy beyond this cycle.  By expanding our nation’s productive capacity—through significant investments in clean energy, manufacturing capacity, and infrastructure—we aim to build further resilience in the U.S. economy to ensure the modern supply-side expansion of the past few years continues in the long run.

Real Gross Domestic Product (GDP)

Real GDP growth accelerated to 2.8 percent in the second quarter of 2024 from the first quarter’s 1.4 percent pace.  Faster growth reflected a pick-up in private consumption and business fixed investment, a stronger build in private inventories, and more government spending—particularly national defense investments.  Domestic forces continue to form the bedrock of the economy’s performance, with firm growth in private domestic final demand (PDFP) for the fourth consecutive quarter (see Table 1 – Real Gross Domestic Product).

PDFP—composed of personal consumption expenditures (PCE), business fixed investment (BFI), and residential investment—measures the economy’s capacity to generate self-sustaining growth from domestic sources.  PCE and BFI growth each accelerated in the second quarter, but residential investment turned from robust growth to a modest contraction.  On balance, PDFP added 2.2 percentage points to topline real GDP growth for the second straight quarter, signaling a foundation for continuing economic strength going into the second half of 2024.

• Personal consumption of goods and services made the largest contribution of any single component to GDP growth, adding 1.6 percentage points to headline growth. Purchases of goods rebounded after the first quarter’s decline, adding 0.6 percentage points to GDP growth. Although growth of consumption of services slowed, it still added just over a full percentage point to real GDP, accounting for roughly 65 percent of PCE’s contribution to topline growth.
• BFI grew at a strong pace in the second quarter, accelerating from the first quarter’s solid pace; on balance, BFI added 0.7 percentage points to GDP growth. Investment in real equipment was significantly stronger while spending on intellectual property products was firm.  Investment in structures has soared over the past few years amid a boom in construction for manufacturing facilities; it slowed somewhat in the second quarter but remains at historic heights.
• Residential investment, the final component of PDFP, declined 1.4 percent in the second quarter, largely reflecting a downturn in the construction of single-family homes. Still, this was a relatively small retrenchment after residential investment’s 16 percent surge in the first quarter.  On balance, this category posed a scant 0.05 percentage point drag on GDP growth in the second quarter and has risen nearly 6 percent over the past four quarters.

Of the other components of GDP, government spending and investment as well as the change in private inventories made positive contributions to the economy’s expansion in the second quarter, while net exports subtracted from growth.  Public sector spending—the acceleration of which was largely due to higher investment in national defense by the federal government—added 0.5 percentage points to GDP growth.  At the same time, private net inventory investment strengthened, particularly nondurable goods inventories at wholesalers as well as inventories at retail motor vehicle and parts dealers; as a result, the change in private inventories swung from a 0.4 percentage point subtraction in the first quarter to a 0.8 percentage point contribution in the second.  By contrast, net exports constrained economic growth as the pace of import growth far exceeded that of exports, leaving the trade deficit at its widest in two years.  As a result, net exports subtracted 0.7 percentage points from GDP growth in the second quarter.

Labor Markets

This year’s second quarter witnessed improved labor market balance as the gap between labor demand and supply narrowed.  Although the average pace of job creation slowed in the past three months, it was accompanied by increased labor force participation rates (LFPRs) for prime-age (ages 25-54) workers (see Table 2 – Labor Market Indicators).

• Payroll job growth slowed in the second quarter of 2024.  Employers added an average of 177,000 jobs per month in the second quarter, slowing from the first quarter average of 267,000 jobs per month.  The second quarter average was still an historically robust pace of job growth, and it remains consistent with recent estimates of the break-even pace needed to maintain a stable unemployment rate. Recent analysis has raised the estimated break-even pace of job growth from 70,000 to 90,000 before the pandemic to 175,000 to 230,000, reflecting faster-than-usual population growth.
• At the end of the second quarter, the unemployment rate pushed above the 4 percent mark for the first time since November 2021.  From March to June, the unemployment rate increased 0.3 percentage points to 4.1 percent.  Yet, despite the moderate increase, the unemployment rate remains near historically low levels and below most estimates of the non-cyclical unemployment rate—that is, the stable rate that would persist if the economy were growing at potential and without labor market imbalances.  Moreover, weekly data since June suggest that unemployment remains near historically low levels early in the third quarter.  The level of initial claims remains in line with that prevailing at the end of February 2020—just before the start of the COVID-19 pandemic in the United States—while the level of continuing claims is a mere 4 percent above that in late February 2020.
• Labor force participation grew in line with population over the second quarter.  The overall LFPR averaged 62.6 percent of the population through April, May, and June, holding near the averages in the first quarter and 2023.  Even so, the stable headline LFPR masked a shift among subgroups.  On the one hand, the average LFPR for workers aged 55 or older decreased by 0.2 percentage points to 38.3 percent in the second quarter.  By contrast, the LFPR for prime-age workers averaged 83.6 percent in the second quarter, up by 0.2 percentage points from the first quarter.  This was the highest prime-age LFPR since 2002.
• Meanwhile, labor demand softened in the second quarter.  Through May, job openings eased to a three-year low, and the ratio of job openings (or vacancies) to unemployed workers declined to 1.22 openings per unemployed worker—on a par with the pre-pandemic high of 1.24.  The vacancies ratio has gradually declined since March 2022, when it stood at a record of 2.03 vacancies per unemployed person, attesting to a significant loosening in labor market conditions.

With improving supply of labor (via increased prime-age labor force participation and above-trend population growth) and declining demand (as measured by job openings), conditions are becoming more balanced, leaving labor markets healthy and relatively strong.

Inflation

Inflation has eased significantly since its mid-2022 peak, and this trend resumed in the second quarter of 2024.  As measured by the consumer price index (CPI), headline inflation over the year through June 2024 had slowed to 3.0 percent—down from the June 2022 peak of 9.1 percent.  Moreover, during the second quarter, the average monthly rate of inflation during the second quarter was just 0.1 percent (or 1.1 percent at an annual rate), slowing from an average 0.4 percent per month (4.6 percent annualized) during this year’s first quarter (see Table 3 – Inflation and Wage Growth Indicators).

• Energy price inflation turned negative in the second quarter.  Prices dropped 1.0 percent, on average, after rising 0.8 percent on average in the first quarter.  Prices were constrained by market perceptions that slower global economic growth would lead to reduced demand for energy, despite heightened geopolitical tensions and the commitment by the Organization of the Petroleum Exporting Countries and allies (OPEC+) to extend production cuts.
• After remaining stable in the previous three quarters at 0.2 percent, average monthly food inflation slowed to 0.1 percent in the second quarter.  Although this rate is slower than rates prevailing before the pandemic, surveys of consumers’ moods suggest that high price levels for food have adversely affected household economic sentiment, notwithstanding substantially slower rates of food inflation.

Core inflation decelerated in the second quarter to an average of 0.2 percent per month (2.1 percent at an annual rate), half the 0.4 percent average per month (4.5 percent annualized) in the first quarter of this year.  The twelve-month core inflation rate in June was 3.3 percent, one-half the peak rate in the autumn of 2022 and the lowest annual rate in over three years.

• Core goods prices declined for the fourth consecutive quarter, deflating 0.1 percent on average in the second quarter.  On a year-over-year basis, core goods prices were down 1.7 percent through June 2024, the steepest decline in about two decades.
• Inflation for rent of housing services (rent of primary residence and owners’ equivalent rent) slowed somewhat in the second quarter.  Prices rose just 0.4 percent on average over the last three months, near the bottom of the 0.4 percent to 0.5 percent range observed since May 2023.
• After ramping up in the first quarter, inflation for non-housing core services decelerated sharply in the second quarter as lower prices for airfares helped offset still-elevated inflation for medical care and motor vehicle insurance, maintenance, and repair.

The Federal Reserve’s preferred measure of inflation, growth in the PCE price index, similarly slowed in the second quarter and is approaching the target rate of 2 percent.  Over the year ending June, PCE inflation was 2.5 percent—or 4.6 percentage points below its June 2022 peak.  Annual core PCE inflation was barely higher than headline inflation at 2.6 percent in June 2024.  Core inflation peaked earlier than headline in February 2022 at 5.6 percent.

Inflation as measured by the PCE price index has notable differences in weights and methodologies.  Historically, twelve-month CPI inflation has exceeded PCE inflation by about 0.4 percentage points on average.  In the second quarter, annual CPI inflation was 0.6 percentage points higher than PCE inflation, reflecting in part the larger weight assigned to owners’ equivalent rent in the CPI.

Housing Markets

Housing market activity slowed on balance in the second quarter.  Most measures of new residential construction weakened further in the second quarter, though completion rates rose (see Table 4 – Housing Construction).

• Total building permits—which precede future home construction—declined on average in the second quarter, though to a lesser extent than in the first quarter.  Growth in single-family permits declined more steeply in the second quarter, while growth in multi-family permits was positive. Even so, permit issuance in the multi-family sector has been trending lower since the latter half of 2022; the level in June 2024 was about two-thirds of the level two years earlier.
• Total housing starts turned positive in the second quarter, reflecting a surge in growth in the volatile multi-unit sector (after a very sharp drop in the first quarter). The decline in single-family starts accelerated in the second quarter.
• The overall inventory of homes under construction fell more sharply at the end of the second quarter, as inventories under construction began to fall in the single-family sector. By the same token, total housing completions turned positive in the single-family as well as multi-family sectors.

Both existing and new home sales dropped over the second quarter, owing to the persistence of elevated mortgage rates and home prices.  Meanwhile, the supply of homes arriving on the market for sale rose more than sales, which lifted the inventory-to-sales ratios for new and existing homes (see Table 5 – Home Sales & Inventories).

• Sales of total existing homes turned negative in the second quarter after an upturn in the first quarter and were down 5.4 percent over the year through June 2024. Nonetheless, the slower pace of sales helped boost the inventory of homes for sale over the quarter to an average of 3.8 months of sales, nearing the pre-pandemic, five-year average inventory-to-sales ratio of 4.2 months.
• New home sales resumed a downward trend in the second quarter, the second net quarterly decrease in two years.  Due in part to the lower pace of sales, the inventory-to-sales ratio for new homes increased modestly to an average of 8.7 months, remaining well above the pre-pandemic (2015-2019) average of 5.6 months.

Home purchase prices and rental inflation slowed in the second quarter.  Even so, elevated home price levels continue to undermine affordability (see Table 6 – Shelter Prices).

• The S&P/Case-Shiller’s national home price index slowed in April (last available data as of July 29), as did the pace of house price growth in the FHFA purchase-only index.  Price levels remained elevated, however.  By either index, house prices were roughly 50 percent higher in April 2024 than at the end of 2019, while real disposable personal income increased roughly 8 percent over the same period.
• For renters, growth of the CPI for rent of primary residence moderated in the second quarter, but the Zillow Observed Rent Index accelerated significantly.  Paces for both measures remained rapid. Despite this mixed picture, a relatively new research series created by the Bureau of Labor Statistics—which has been shown to lead the CPI for primary rent by about a year—showed an outright decline in renters’ shelter costs in the second quarter. This quarterly series better reflects prices renters would face if they changed housing units every quarter.

Risks to the Outlook

Inflation:  Inflation has fallen substantially from the highs of mid-2022, and we expect it to continue to ease further and return to historical norms.  However, risks remain to the inflation outlook on both sides.  Continued strong demand growth without comparable supply expansion could push inflation above consensus forecasts—as could additional supply-chain disruptions from new geopolitical developments. Alternatively, a faster-than-expected cooling in the labor market and in economic activity could bring inflation down faster—but with greater cost for American households. 

Geopolitical instability:  Russia’s war in Ukraine and the ongoing conflict in the Middle East continue to add uncertainty to the medium-term outlook.  The uptick in global shipping costs, if exacerbated, could further complicate the supply chain instability that has otherwise largely resolved in the wake of the pandemic.  Fortunately, major impacts to the U.S. economy have not materialized to date, but these remain important risks to monitor. 

Consumer slowdown and labor market cooling:  Strong consumption growth in 2023 and in the first half of 2024 has supported GDP growth, fueled by strong labor markets and real income growth.  Although households have drawn down much of their excess savings from the pandemic period, debt burdens remain low relative to historical levels.  While growth in real incomes should continue to support households’ consumption, a significant cooling in labor markets could slow income growth, reduce consumption, and further slow the economy.  This concern is particularly notable among younger and lower-income households with rising credit card delinquency and default rates—although, in general, delinquencies still reflect normalization from the low levels that persisted during the pandemic.

CONCLUSION

The American economy remains strong, with a healthy labor market and persistently easing inflation. Just a few years ago, economic forecasters did not expect that such a combination of persistently strong demand and moderating inflation was likely—and, in many cases, even possible.  But over the past three years, the Biden-Harris Administration has made significant investments to lower costs, boost economic potential, and make our economy more resilient to risks.  The outperformance of the American economy in the first half of 2024 shows these investments are paying off.

Table 1 – Real Gross Domestic Product

Source. Bureau of Economic Analysis, Gross Domestic Product (Advance Estimate), Second Quarter 2024.

Table 2 – Labor Markets

Sources. Bureau of Labor Statistics, The Employment Situation – June 2024; Job Openings and Labor Turnover – May 2024.

Table 3 – Inflation

Sources. Bureau of Labor Statistics, Consumer Price Index – June 2024. Bureau of Economic Analysis, Personal Income and Outlays, June 2024.
¹ For CPI, 12-month growth is not seasonally adjusted.
² Imputed from CPI Data.

Table 4 – Housing Construction

Sources. Census Bureau, Monthly New Residential Construction, June 2024.

Table 5 – Home Sales & Inventories

Sources. Census Bureau, Monthly New Residential Sales, June 2024. National Assocation of Realtors, Existing-Home Sales.

Table 6 – Shelter Prices

Sources. Standard & Poor’s, S&P CoreLogic Case-Shiller Home Price Indices. Federal Housing Financing Agency, Home Price Index (HPI) Monthly Report. Zillow, Housing Data. Bureau of Labor Statistics, Consumer Price Index – June 2024. Bureau of Labor Statistics, Price and Index Number Research, New Tenant Rent Index.
¹ Annualized monthly rate through April. S&P and FHFA house price indices will be published on July 30.
² 12-month percent change, not seasonally adjusted.
³ Not seasonally adjusted. Quarterly growth rates are 4-quarter percent changes.