US growth dragged lower by weakening consumption

But despite today's downwards revision to Q1 GDP, the outlook for US activity looks better than the headline numbers suggest, albeit an outlook with activity slowing.

By Stuart Cole | @Stuart Cole | 30 May 2024


Today’s second reading of the US Q1 GDP figure showed the advance reading revised downwards from 1.6% to 1.3%, in line with market consensus. The revision was largely attributable to softer domestic consumption, trade, and inventories. The latter two components are both volatile and as such can be looked through to a degree (although the inventories number does tie in with the softer picture being painted by survey data). But the consumption story is more worrying and does not bode well for growth going forward.

The softer consumption reading was almost entirely the result of weaker spending on goods, something that had already been flagged in April's retail sales report published earlier this month. And the big worry is that the outlook for spending going forward does not look bright. The positive boosts to consumption seen last year have now largely faded away, while a softer labour market and slowing wages growth expected over H2 look set to see consumption losing further momentum going forward. And on top of this is the high interest rate the US economy is currently working under and which is having an increasingly dampening effect on economic activity.

The drop in consumption was very much highlighted in the Q1 personal consumption figure, which was revised down sharply from 2.5% to 2.0%, a significant drop from the average growth rate of 3.2% seen over H2 last year, and very much highlighting how waning post-pandemic excess savings and – more importantly – slowing income growth are weighing on consumer spending. Strip consumption out of the numbers and everything else largely balances, as the bigger drag from inventories and trade was offset by upward revisions to private fixed investment and a modest uptick in government spending.

The big question is what today’s report means for US growth going forward. Certainly the 1.3% Q1 GDP number cannot be described as anything other than ‘soft’. But equally, there are no signs emerging that US economic activity is in danger of collapsing. The figure for Final Sales, also published by the Bureau for Economic Analysis and generally regarded as a more solid measure of underlying domestic demand, was also revised downwards, but to a much more solid print of 2.8% from 3.1%, and much closer to last year’s H2 average reading of 3.2%. This suggests that consumption is stronger than is being reported in the GDP numbers.

Our suggestion at this juncture is that the picture being painted is one of the US economy continuing to grow, but with the pace of this expansion cooling as we go through 2024 and into 2025, in turn exerting a drag on the labour market and, by implication, consumption. For the Fed this looks set to deliver the softer growth and labour market conditions it needs to see if interest rates are to be cut – and which leaves the inflation numbers as the final piece of the jigsaw needing to fall into place for a first interest rate cut to be finally delivered. The April PCE number never looked more important.