Key takeaways
The U.S. economy demonstrated continued momentum in the second quarter, growing 3%.
Recent favorable economic and corporate earnings news helped stocks rebound after a short-lived selloff in early August.
Anticipated Federal Reserve interest rate cuts in September are buoying investor sentiment.
The U.S. economy gained momentum in 2024’s second quarter, with the nation’s Gross Domestic Product (GDP) expanding at an annualized rate of 3.0%. It marked a notable improvement from the first quarter’s 1.4% growth rate. It also represents more robust growth than 2023’s 2.5% GDP expansion.1
“We still think this is a very positive investment environment,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “This is a well-telegraphed, slowing economy. If we felt there was a structural economic shift underway, we’d come to a different conclusion.
Investors showed concern in early August following the release of a weaker-than-expected jobs report indicating slowing job growth and rising unemployment.2 It temporarily altered what had been generally favorable investor sentiment and contributed to a rapid market selloff (the S&P 500 fell more than 8% from its July peak). However, subsequent economic data releases offered a more promising picture, and equity markets quickly rebounded.
“These drawdowns happen, but not very often,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “We still think it’s a great time to be invested.”
Improved second-quarter GDP reflected a solid increase in consumer spending, especially on services. Consumer spending has consistently been the biggest driver of the economic expansion since a brief but deep, COVID-19-related recession in 2020. In the second quarter of 2024, consumer spending added 1.95% to GDP growth, with increases in both goods and services activity.1
“Consumer spending is proving resilient, and was somewhat elevated in the second quarter,’” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “This report provides signs of a much stronger economy, but we add a note of caution that data from one quarter does not yet represent a trend.”
Haworth says while the pace of growth may taper off, there are signs this economy has staying power. “Recent reports show consumer spending remains steady, durable goods orders are firm, manufacturing activity is stable and services activity is very good.” Haworth notes that while the markets were concerned over the July jobs report, other labor market metrics aren’t nearly so alarming. “Weekly initial jobless claims remained relatively steady in recent months, telling us that layoff activity is not picking up in any notable way.” Haworth believes that indicates no significant economic slowing is on the horizon.
Over the course of the 21st century, the global economy has confronted unique challenges, such as the financial crisis of 2007-2009 and the onset of the COVID-19 pandemic in 2020. Yet through a nearly 25-year period, the U.S. economy has expanded in all but two years. In the wake of inflation's surge in 2022, the Fed responded by sharply raising the federal funds target interest rate it controls. While designed to slow economic growth as a way to tame inflation, many analysts feared the Fed's actions, which led to higher interest rates across the economy and markets, would create too many economic headwinds, potentially resulting in a recession. Yet the economy has managed to grow consistently throughout this period of higher interest rates.
The Fed indicated recently that its focus is not just to stem inflation’s threat, but also to follow its mandate to maintain maximum employment.3 Concerns have grown that the steady rise in the unemployment rate over the past year is a sign of a weakening labor market, a possible trigger of an economic slowdown. “The Fed has made clear it intends to cut interest rates at its September meeting,” says Haworth. “The main question now is how far and how fast the Fed cuts rates.”
Bill Merz, head of capital markets research for U.S. Bank Wealth Management, says recent inflation declines give the Fed additional leverage. “If the Fed continues to see a modest deceleration in inflation, but balances that with concerns about a decelerating labor market, it gives them more room to cut rates faster than they initially planned.” Merz says investors may see, in the coming months, potentially meaningful Fed rate cuts designed to help maintain economic expansion.
“Modest, steady economic activity continues to be the path we appear to be on at this point, and there don’t seem to be signs of serious recession risk,” says Haworth. “Nevertheless, a big question that may drive the markets and the pace of Fed rate cuts is whether consumers can continue spending at a sufficient pace to keep the economy growing.”
Economic obstacles could still emerge, even as the Fed contemplates initiating rate cuts. “What surveys are telling us is that price levels are challenging for some consumers, and on top of that, borrowing is expensive as well,” says Haworth. “While that may ultimately impact consumer spending levels, we’re not seeing it yet.”
Stubbornly high interest rates complicate matters for businesses as well, particularly as it relates to business capital investment. “If rates stay elevated and companies are forced to issue debt with more significant financing costs, that could dampen business activity and threaten current expectations for economic growth,” according to Haworth. Nevertheless, corporate capital expenditures remain solid to this point.
“We still think this is a positive investment environment,” says Freedman. “This is a well-telegraphed, slowing economy. If we felt there was a structural economic shift underway, we’d come to a different conclusion.” Freedman says consumers remain in a solid position to play a pivotal role in keeping the economic expansion intact.
Haworth says the combination of ongoing economic growth and persistent inflation make stocks more attractive relative to bonds. Haworth adds if the economy manages to demonstrate ongoing strength in the coming months, that could work to benefit non-technology sectors of the market that are more dependent on favorable economic trends. For example, utility stocks, which struggled in 2023, represent one of the top-performing sectors within the S&P 500 year-to-date in 2024.4
Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet the challenges of what continues to be a dynamic market and economic environment.
Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.
The technical definition of a recession is two consecutive quarters of declining Gross Domestic Product (GDP) growth. However, more complex formulas are often used. For example, in 2022, according to the U.S. Bureau of Economic Analysis, GDP declined slightly in the first quarter (-2.0%) and second quarter (-0.6%) but given a low unemployment rate and other favorable factors, this period was not considered an official recession. The accepted arbiter of a recession, the National Bureau of Economic Research, considers a variety of measures to determine a recession’s timing and length.
The most recent recession was an unusual one, related to the start of the COVID-19 pandemic. It lasted only from February through April 2020, one of the shortest recessions on record. But it also was one of the most severe. According to the U.S. Bureau of Economic Analysis, the U.S. economy declined at an annualized rate of 5.3% in 2020’s first quarter and declined again by 28% (annualized) in the second quarter. However, it quickly rebounded, growing by a 34.8% annualized rate in the third quarter. This was an unusual circumstance related to the partial closing of many businesses and schools and the sudden layoff of workers in response to the onset of the pandemic, followed by a rapid reopening for most businesses. The previous recession occurred more than a decade earlier, the so-called Great Recession of 2007-2009. This recession was tied to the financial crisis that rocked the global economy for an extended period.
While it is difficult to predict a recession in advance, the current state of the economy makes the possibility of a recession appear remote in 2024. “It seems likely the economy may avoid a recession in the near term, though we can expect that real Gross Domestic Product (GDP) growth will remain modest over time,” says Matt Schoeppner, senior economist at U.S. Bank. “It might qualify as what we call a ‘growth recession,’ where we see a slow economy, but with few ramifications for the job market.” In 2024’s first quarter, the economy grew at an annualized rate of 1.4%, but improved significantly in the second quarter, growing at a 2.8% annualized rate.1
After the slowest year for existing home sales in nearly 30 years last year, learn how the housing market is slowly regaining momentum.
The yield curve between 2-year and 10-year Treasuries is no longer inverted after more than two years.
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