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Residential consumption drives the Q2 GDP of the USA beyond market expectations, and the market's concern about the recession of the USA economy has also receded. Although the USA economy is assumed to have a soft landing as its benchmark for the year, the economic trend is still cooling down, and the focus is on the stagflation risk after Trump is re-elected and the interest rate is lowered.

The 'Fog' of the US economy-Outlook Based on Q2 GDP.

(I) Why did Q2 GDP in the US surpass market expectations ? Residential consumption is the main factor, supplemented by inventory replenishment, equipment investment, and government investment.

In Q2 2024, the real GDP of the USA grew at an annualized rate of 2.8%, far exceeding the market's expected 2.0%. The strong increase in Q2 GDP comes mainly from residential consumption, followed by non-residential investment, government investment, and inventory replenishment, which support the economy. The wealth effect may partially explain the strengthening of consumer goods consumption by residents. In Q2 2024, the market expectation of a Fed rate cut in the USA increased significantly, the stock market rose, and the Fed's financial conditions index also became more relaxed.

Inventory replenishment and non-residential investment accelerated recovery, while residential investment was impacted by high interest rates. In Q2 2024, private inventories in the USA increased by 71.3 billion USD, mainly driven by the wholesale and retail industries, corresponding to the tenacity of US consumer goods consumption. The inventory replenishment and transmission of earlier construction investment led to a 5.2% annualized increase in non-residential investment in Q2 2024, which continued to increase for the third consecutive quarter, while real estate investment decreased, mainly reflecting the earlier period of high interest rates. Domestic demand recovered, causing the trade deficit to expand, and government spending supported the economy.

(II) How to view the US economy in the second half of the year? Q2 was already the peak, and the economy might cool down.

The market expects the US economy to grow at 2.3% for the whole year of 2024, with Q2 being the peak for the whole year, and economic internal demand slowing down in Q3 and Q4. From a structural point of view, residents' consumption is trending downward, with a focus on the labor market and market interest rates. As the US employment market cools and wage growth falls back, and tax payments delay, US residents' income may continue to weigh on consumption in 2024, further compounded by deteriorating consumer credit and savings depletion. The cyclical pressure facing overall US residential consumption in the future may be greater.

Private investment: Q2 may be the high point for the whole year, and follow-up attention to capital expenditures and credit conditions. Under the transmission of the earlier high interest rates and weak consumer goods consumption by residents, US private investment may also face pressure in the second half of the year. Among the USA's three major private investments, equipment investment may be the most resilient because it is more likely to be driven by the delayed enthusiasm of earlier construction investment.

Government consumption and investment: Fiscal stimulus or may support the economy. Looking forward to the second half of the year, in April, the Biden administration's external assistance bill was passed; in July, student loan forgiveness began to be implemented, and the scale of fiscal expenditure may be further expanded in the future. The growth rate of fiscal expenditure for the whole year may exceed last year's level, and the rise in the growth rate of fiscal expenditure may help support GDP growth.

We believe that recent financial market volatility may have a certain impact on US residents' consumption in the second half of the year, and factors such as weakening of the employment market will also contribute to this, which will further affect the follow-up inventory replenishment rhythm and corporate expectations, while residential investment will also begin to reflect the impact of the rising US bond interest rates in the first half of the year. The US economy in the second half of the year may still cool down, rather than further strengthening based on Q2.

(III) Focus on the stagflation risk of Trump's re-election and the Fed's rate cut.

The market's expectation of a 50 basis point interest rate cut by the Fed in September has fallen, and the expectation of a short-term economic downturn has moderated, but the market still has a strong expectation for a rate cut in September. In the fourth quarter, attention needs to be paid to the possibility of a combination of US economic slowdown and resistance to lower inflation. Looking forward, the fourth quarter needs to pay more attention to the US economic slowdown, but also to the transformation of the market pattern formed by the strengthening of CPI inflation (core non-durable goods inflation + rent rebound + Fed rate cuts), while the risk of the US presidential election in the second half of the year will also be reflected in the impact on the expectation of the financial market.

Risk warning

Geopolitical conflict escalation, the Fed's return to 'hawkishness,' and the accelerated contraction of financial conditions.

This article is reprinted from the 'swhy macro' WeChat public account, analysts: Wang Maoyu, Zhao Wei; edited by Zhongtong Finance: Huang Xiaodong.

Editor/ping