GDP malaise? Why U.S. second-quarter growth will be weak again.

By Jeffry Bartash

Consumer spending, rising trade deficit are sore spots

The U.S. economy grew a drab 1.4% in the first three months of the year - and it looks like a shabby performance is in store for the second quarter.

After starting out with a 3.9% estimate, the Atlanta Federal Reserve's forecast tool predicts gross domestic product only grew at an annual 1.5% pace in the second quarter. The period covers April to June.

A similar forecast by S&P Global, arguably the gold standard on Wall Street DJIA SPX, puts its U.S. growth estimate at a slightly higher 1.8%.

If these forecasts are on the mark, it would reflect the slowest back-to-back quarters of U.S. economic growth since first six months of 2022.

Why the weakness? Blame three things: Slower consumer spending, a rising trade deficit and lackluster business investment.

Consumer spending

S&P estimates consumer spending is likely to rise at a 1.6% rate in the second quarter, just a touch faster than in the first three months of the year.

Consumer spending is the main engine of the economy, accounting for 70% of all the activity that goes on. Spending had risen at frothy 3%-plus rate in the final two quarters of 2023 before tapering off.

One caveat: Auto sales slumped in June because of a cyberattack that prevented the completion of as many as 600,000 sales.

Normally the spending would have shown up in second quarter. Now it will appear in the third quarter.

Business investment

High interest rates and slower consumer spending have discouraged businesses from investing and producing more.

They have have reduced investment in the second quarter on large structures and cut back on equipment spending.

Inventories probably grew a bit faster, but not as fast as expected.

Businesses are not expected to boost investment until the Federal Reserve begins to cut interest rates.

Trade deficit

The trade deficit rose in May to a 19-month high and that could have a sizable effect on GDP. Bigger deficits are a subtraction from growth.

S&P estimates a wider trade deficit could shave as much as one percentage point off GDP, making it look even worse than it really is.

-Jeffry Bartash

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07-04-24 0701ET

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