Kiplinger GDP Outlook: Economic Growth to Slow to Long-Term Trend
GDP growth was likely solid, but the economy is poised to downshift to 2.0% quarterly through 2025.
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Third-quarter GDP growth will likely come in between 2.0% and 2.5% at an annual rate when it is released on Oct. 30. Non-housing construction and exports will bump up a bit, while imports should grow more slowly than in the second quarter.
Second-quarter GDP growth registered a strong 3.0%, a bounce-back from 1.3% in the first quarter. Decent consumer spending in the second quarter was helped by a partial reversal of the first quarter’s motor vehicle sales slump. Businesses also added to their vehicle purchases. A reversal in business accumulation of inventories added 0.8 percentage points to growth, as businesses became more confident that a serious economic slowdown isn’t happening. Exports grew slightly, and federal defense and state and local government spending added to growth, as well. Corporate profits grew, reversing the first quarter’s decline.
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Future economic growth is likely to be slower. Consumers have been reducing their savings in order to spend. The savings rate was just 2.9% in July, down from 3.5% in April, and is likely to rise over the next 12 months, which will cut into spending. Gains in consumer purchases of services have begun to slow as they become more cautious about their finances. The second quarter’s jumps in consumer purchases of home furnishings, business purchases of motor vehicles and federal defense spending were likely one-offs. Overall business spending should stay at the current modest pace because of high interest rates and tight bank lending standards.
There aren’t likely to be jumps in housing and commercial or office construction, for now. Import growth is far outstripping export growth, meaning that more of U.S. consumer spending is going to support weaker economies overseas. State and local government spending will start to slow as their post-pandemic hiring spree diminishes and their staffing approaches normal levels.
GDP growth for 2024 will be 2.7%, a bit higher than in 2023, but will then slow down to 2.1% in 2025. Growth close to 2.0% is not too bad. In fact, it is in line with the economy’s potential growth rate over the long run. Long-run growth potential is determined by the sum of productivity gains and labor force growth, and those two factors point to a roughly 2% long-term pattern for GDP.
Source: Department of Commerce: GDP Data
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David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.
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