On Thursday (25th) local time, the US Department of Commerce will release the preliminary data for the second quarter Gross Domestic Product (GDP) for this year. The latest forecasts from Wall Street suggest that the US GDP for the last quarter is expected to rebound to around 2%. For the Federal Reserve, the next steps largely depend on economic data, and the labor market may become the key factor that ultimately influences the Federal Reserve's monetary policy stance.

Can consumer spending and investment help the economy rebound?

First Financial has summarized and found that the median forecast for the US economic growth rate in the second quarter is around 2.0%. There is a significant divergence in internal forecasts from the Federal Reserve, with the Atlanta Fed's GDPNow model estimating a growth of 2.7%, while the New York Nowcast predicts a growth rate of 1.8%. According to data released by the US Department of Commerce on June 27, the final annualized growth rate of the US GDP for the first quarter, seasonally adjusted, was 1.4%.

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Consumer spending, as the engine of the economy, will continue to be the main driving force, accounting for about 70% of the US economy. Considering the recent stabilization of retail data, S&P estimates that consumer spending in the second quarter may grow at a rate of 1.6%, slightly higher than the 1.5% in the first three months of this year. In contrast, in the second half of 2023, the continuous release of household consumption demand drove the GDP growth rate to maintain at 3.0%.

Lydia Boussour, a senior economist at EY-Parthenon, analyzed: "Compared to the same period last year, we see a slowdown in spending, driven by low-income and young families. Families with higher debt burdens and weaker savings cushions are more selective and more sensitive to prices."

Goldman Sachs predicts that investments, including business and inventory, in the last quarter are expected to continue to exceed expectations, providing more momentum to the economy.

As sectors sensitive to interest rate levels, manufacturing and real estate, which account for one-fifth of the US economy, continue to be sluggish. Recent data shows that the manufacturing (PMI) in the eastern and central regions of the United States in June is still in a contraction range, and the low demand for goods has also caused fluctuations in job positions. At the same time, the demand for commercial real estate is lukewarm, high mortgage interest rates and high housing prices have limited the activity of transactions, including new and second-hand houses, and the construction industry's confidence index is not performing well.

At the same time, trade may continue to drag on economic growth. Due to the decline in exports, the US trade deficit continues to expand. The trade deficit in May increased by 0.8%, reaching $75.1 billion, rising to the highest point in 19 months. S&P estimates that a larger trade deficit may slow down the GDP by as much as one percentage point.

As an important indicator, the labor market is considered to be reflecting potential changes in the US economy. The June non-farm report shows that although the number of new jobs remains above 200,000, a large part of it is government sector jobs, and private sector recruitment is lagging. At the same time, after revising the data for May and April, the average monthly increase in jobs in the second quarter has dropped from 267,000 in the first quarter to 177,000, a decrease of more than 30%.

New turning point?Even if the GDP rebounded in the second quarter, it could become a new turning point. The Federal Reserve's economic conditions Beige Book released last week stated that more regions are facing economic pressures, and due to the uncertainty of upcoming elections, domestic policies, geopolitical conflicts, and inflation, it is expected that economic growth will slow down in the next six months.

The rebalancing of the labor market and the progress of prices towards the medium-term 2% target are considered to pave the way for the Federal Reserve to cut interest rates as early as September. According to previous statements by Federal Reserve Chairman Powell, they need to have confidence that the inflation rate will reach the 2% target before lowering interest rates. However, any unexpected weakness in the labor market could trigger a rate cut. With the U.S. unemployment rate rising to 4.1% in June, the U.S. economy is closer to triggering the Sumner recession rule, which is when the three-month average of the unemployment rate is 0.5 percentage points higher than its 12-month low.

Boris Schlossberg, a macro strategist at asset management firm BK Asset Management, said in an interview with Yicai that Federal Reserve officials are increasingly concerned about the downside risks in the labor market, and further weakening of demand may lead to a greater unemployment response. The current decline in labor demand is mainly achieved by reducing job vacancies, and the next step may be a reduction in the number of positions.

Federal funds futures pricing shows that a rate cut in September has been fully anticipated, and there is a hope for two rate cuts this year. Schlossberg analyzed that, according to the Federal Reserve's economic forecast, the discussion on rate cuts should begin soon. However, he believes that the Federal Reserve also needs to plan for unexpected situations, as the transition to a slower but sustainable growth rate may be full of pressure.

Bursol said that the economy will continue to see a slow deceleration in the future, but he does not think there is anything to worry about, "We do believe that the weakness in the labor market and the fact that inflation is on track indicate that recalibration (of interest rates) should start soon."

Preston Caldwell, Chief U.S. Economist at Morningstar, predicts that U.S. economic growth will drop to 1.6% by the end of 2024, and to avoid the economy getting out of control unexpectedly, the Federal Reserve will take the initiative to moderately relax policy (cutting interest rates in September), "I expect (the U.S.) economy to bottom out in 2025, dropping to an average annual growth rate of 1.4% by 2025, and then start to accelerate again under the background of loose monetary policy."