Our economic outlook for the United States
August 19, 2024
Our outlook for year-end 2024
2%
Economic growth,
year over year
The U.S. economy displayed continued resilience in the second quarter, with real GDP increasing by an annualized 2.8%. The acceleration from 1.4% growth in the first quarter was driven by firm increases in consumer spending, nonresidential fixed investment, and government spending. Through midyear, GDP growth is tracking largely in line with our 2% outlook for the year. We believe that growth is likely to cool though remain at a near-trend pace by year-end.
2.9%
Core inflation, year over year
Broad consumer prices rose in July at the slowest year-over-year pace since early 2021. Shelter price increases drove the 2.9% rise in the Consumer Price Index (CPI). The report reaffirms our view that shelter inflation will remain sticky through the rest of the year as supply expands only slowly and demand remains steady. We foresee the pace of the core Personal Consumption Expenditures index rising from its current 2.6% year-over-year level because of base effects, or challenging comparisons with year-earlier data.
4.75%–5%
Monetary policy rate
We expect the Federal Reserve to make two rate cuts in 2024, though we will continue to monitor data closely, especially ahead of the September meeting. Amid anticipated below-trend growth in 2025, core inflation falling to near the Fed’s 2% target, and an unemployment rate rising moderately above current levels, we expect the Fed’s rate target to end 2025 in a range of 3.25%–3.5%. That would be 2 percentage points below its current 5.25%–5.5% target range.
4%
Unemployment rate
Official data, including the unemployment rate reaching a 32-month high of 4.3% in July, suggest slowing momentum in the labor market. The unemployment rate increase is attributable to labor force growth exceeding job growth rather than an increase in job losses. However, the result is the same: Having more workers competing for jobs puts downward pressure on wage growth, which should comfort the Fed even as we remain cautious regarding industry-specific wage trends.
What I’m watching
Cyclical employment and an economy with room to run
In the last two years, the three sectors that represent noncyclical employment—government, health care, and education—have created about half of the new jobs in the U.S. despite representing just 30% of the labor market. Government employment is less sensitive than other industries to economic downturns as the sector is an attractive destination for workers in such periods. Spending on health care and education is nondiscretionary, so employment in these sectors is typically agnostic to the economic environment. Meanwhile, cyclical employment—the rest of the labor market—typically rises and falls with economic conditions. Though cyclical employment has moderated since 2022, it continues to grow, an encouraging sign that the economic expansion will likely continue and the labor market will remain strong throughout 2024.
Adam Schickling,
Vanguard Senior Economist
Notes: Employment growth is the year-over-year change in the three-month moving average. Noncyclical employment represents education, government, and health services, industries that historically have had little correlation with the broader economy. Cyclical employment represents all other industries, such as but not limited to finance, professional and business services, construction, manufacturing, and wholesale and retail trade.
Sources: Vanguard calculations using data from the St. Louis Federal Reserve FRED database as of June 13, 2024.
What I’m watching
Healthy balance sheets remain a support for consumers
After a buildup in liabilities ahead of the 2008 global financial crisis, households have deleveraged and growth in assets has outpaced growth in liabilities over the last decade. Although this positive gap has moderated from its pandemic-era surge, it remains elevated. We expect healthy balance sheets and a steady labor market to continue to support consumer spending in the coming quarters, though at a more modest pace than in recent quarters.
Rhea Thomas,
Vanguard Economist
Notes: The chart depicts the cumulative percentage growth in household assets and liabilities since 1990.
Sources: Vanguard calculations using data from the Federal Reserve as of June 11, 2024
What I’m watching
The role of shelter in keeping inflation sticky
Shelter, a component of services inflation that comprises 45% of the core Consumer Price Index and 17% of the core Personal Consumption Expenditures index, is the primary cause of sticky inflation and a factor in our view that the Fed will find it difficult to cut interest rates this year. We expect a shortfall of 1 million single-family homes at year-end 2024, owing partly to a “mortgage lock-in” effect whereby homeowners are reluctant to sell when that means giving up low fixed-rate mortgages. We foresee shelter inflation falling to 4.8% year over year by the end of 2024, keeping inflation solidly above the Fed’s comfort zone.
Ryan Zalla,
Vanguard Economist
Sources: Bureau of Labor Statistics Consumer Price Index data accessed via Refinitiv on June 6, 2024, and Vanguard forecasts.
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