Goldman sees modest pickup in U.S. GDP growth in H2

U.S. activity data had largely underperformed until recently, raising concerns about an overly rapid economic slowdown. However, last week’s retail sales and industrial production reports provided some relief, prompting Goldman Sachs economists to revise their Q2 GDP growth to 2.3%.

“Our estimate implies that GDP grew at a 1.9% annualized pace in 2024H1 and domestic final sales grew at a 2.3% pace, easily beating gloomy consensus expectations at the start of the year and falling only a touch short of our own initial forecast,” economists said in a Sunday note.

Consumer spending has been on a rollercoaster ride this year, partly due to changes in disposable income and seasonal adjustment challenges. However, Goldman believes it is now expected to grow by about 1.8% in the first half of 2024, only slightly below the year’s initial forecast.

Investment, including residential, business, and inventory investment, exceeded expectations, although housing activity slowed in Q2 following a Q1 surge prompted by lower mortgage rates.

Net exports fell short due to ongoing weaknesses in goods exports, which remain significantly below pre-pandemic levels despite a recovery in imports.

Looking ahead, Goldman economists now forecast GDP growth of 2.6% in Q3 2024 and 2.4% in Q4 2024, averaging 2.5% for the second half of the year.

“Underpinning this is our expectation that consumer spending will continue to grow at a robust pace, supported by solid real income growth powered by a strong labor market as well as a positive wealth effect from recent increases in stock prices,” they wrote.

“Our slightly stronger growth forecast for Q3 reflects a rebound in the net trade contribution driven by softer imports and higher aircraft and other exports.”

On the investment front, economists expect a mixed outlook for the second half. They project business investment growth to decelerate to 3% as the factory-building boom, spurred by the CHIPS Act and Inflation Reduction Act subsidies, reaches its peak. However, investment in equipment for these factories and AI is expected to increase.

Residential investment is likely to decline slightly due to a slowdown in apartment construction and modest further weakness in the near term as buyers await lower interest rates.

The bank’s forecast that GDP growth will rise from 1.9% in the first half of 2024 to 2.5% in the second half leads to a Q4/Q4 GDP growth rate of 2.2%. This forecast is more optimistic than the consensus of 1.6% but aligns with their estimate of short-term potential GDP growth, which is currently bolstered by an increased labor supply from above-trend immigration.