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A Goldilocks economy is defined as one that has been witnessing steady economic growth but not so much that it can stoke inflation. The U.S. economy is currently in this situation. The U.S. economy expanded at a faster-than-expected pace in the second quarter of 2024.
The Bureau of Economic Analysis advance estimate for second-quarter US gross domestic product (GDP) revealed that the economy grew at an annualized pace of 2.8%, well above the 2% growth expected by economists surveyed by Bloomberg, as quoted on Yahoo Finance. The reading came in higher than first-quarter GDP, which was revised down to 1.4%.
Consumer spending, which makes up more than two-thirds of U.S. economic activity, grew 2.3% in the second quarter, up from 1.5% growth in the first quarter. Spending on goods such as cars and appliances increased 2.5% after falling 2.3% in the first quarter. The spending was broad-based across services like healthcare, housing and utilities, as well as club memberships, visits to sports centers, parks, theaters and museums, and gambling.
Business investment picked up, led by an 11.6% annual increase in equipment investment and a 3.1% increase in government spending. Growth also ramped up as businesses increased their inventories. Notably, inventories added 0.82 percentage points to GDP growth after being a drag for two straight quarters. On the other hand, imports outpaced exports, which weighed on GDP growth.
Meanwhile, inflation eased lately. The Consumer Price Index rose just 3% year over year in June, down from an annual growth of 3.3% in May. On a monthly basis, the index declined 0.1% from May’s flat reading. This marked the first monthly drop in inflation since 2020 and the slowest annual price gain since March 2021. An improving economy and cooling inflation may lead the Federal Reserve to cut rates as soon as September.
ETF Areas to Play
Against the abovementioned backdrop, below we highlight a few investing areas and their related ETFs that could gain in a Goldilocks U.S. economy.
As consumer spending rules the major share of the U.S. GDP, solid economic growth will have a positive impact on the consumer discretionary sector. The tendency to import more also shows people's desire for more consumption. Plus, the upcoming rate cuts should benefit the sector and the fund XLY even more.
Asspending across leisure activities increases, RTH is set to benefit. This is truer given the second half of the year is full of merry-making events like Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas. Plus, the back-to-school season, the shopping extravaganza between July and September that comes second to holiday shopping, is a much-awaited time for students and retailers.
Small-Cap – iShares Russell 2000 ETF (IWM - Free Report)
Small-cap stocks generally lead the way higher on improving American economic health as these are closely tied to the U.S. economy and generate most of their revenues from the domestic market. In any case, investing rotation is happening from technology (due to apparent “AI fatigue”) to small-caps. Lately, small-cap stocks have seen good momentum (read: Small-Cap ETFs to Rally on Upbeat U.S. Q2 GDP Growth Data?).
With the global economy in decent shape, things are fine for tech stocks.This is because the chances of an imminent recession have lessened, a good omen for tech players, which are growth plays. At the same time, Fed rate cuts are likely in the fall while the European Central Bank (ECB) has already walked the easing route.A low interest rate situation doesn’t hurt tech stocks’ cash inflows. Instead, their cost of borrowing gets reduced, eventually boosting profit margins.
The banking corner of the broad financial sector has been an area to watch lately as investors have started to dig into the undervalued area. The probability of Donald Trump returning to the White House has risen lately, and the bets over Fed rates cut in September have also ramped up. Both are favorable for the banking sector. The robust second-quarter results of the banks have added to the strength.
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ETF Areas to Focus on in a Goldilocks US Economy
A Goldilocks economy is defined as one that has been witnessing steady economic growth but not so much that it can stoke inflation. The U.S. economy is currently in this situation. The U.S. economy expanded at a faster-than-expected pace in the second quarter of 2024.
The Bureau of Economic Analysis advance estimate for second-quarter US gross domestic product (GDP) revealed that the economy grew at an annualized pace of 2.8%, well above the 2% growth expected by economists surveyed by Bloomberg, as quoted on Yahoo Finance. The reading came in higher than first-quarter GDP, which was revised down to 1.4%.
Consumer spending, which makes up more than two-thirds of U.S. economic activity, grew 2.3% in the second quarter, up from 1.5% growth in the first quarter. Spending on goods such as cars and appliances increased 2.5% after falling 2.3% in the first quarter. The spending was broad-based across services like healthcare, housing and utilities, as well as club memberships, visits to sports centers, parks, theaters and museums, and gambling.
Business investment picked up, led by an 11.6% annual increase in equipment investment and a 3.1% increase in government spending. Growth also ramped up as businesses increased their inventories. Notably, inventories added 0.82 percentage points to GDP growth after being a drag for two straight quarters. On the other hand, imports outpaced exports, which weighed on GDP growth.
Meanwhile, inflation eased lately. The Consumer Price Index rose just 3% year over year in June, down from an annual growth of 3.3% in May. On a monthly basis, the index declined 0.1% from May’s flat reading. This marked the first monthly drop in inflation since 2020 and the slowest annual price gain since March 2021. An improving economy and cooling inflation may lead the Federal Reserve to cut rates as soon as September.
ETF Areas to Play
Against the abovementioned backdrop, below we highlight a few investing areas and their related ETFs that could gain in a Goldilocks U.S. economy.
Consumer Discretionary – Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
As consumer spending rules the major share of the U.S. GDP, solid economic growth will have a positive impact on the consumer discretionary sector. The tendency to import more also shows people's desire for more consumption. Plus, the upcoming rate cuts should benefit the sector and the fund XLY even more.
Retail – VanEck Retail ETF (RTH - Free Report)
Asspending across leisure activities increases, RTH is set to benefit. This is truer given the second half of the year is full of merry-making events like Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas. Plus, the back-to-school season, the shopping extravaganza between July and September that comes second to holiday shopping, is a much-awaited time for students and retailers.
Small-Cap – iShares Russell 2000 ETF (IWM - Free Report)
Small-cap stocks generally lead the way higher on improving American economic health as these are closely tied to the U.S. economy and generate most of their revenues from the domestic market. In any case, investing rotation is happening from technology (due to apparent “AI fatigue”) to small-caps. Lately, small-cap stocks have seen good momentum (read: Small-Cap ETFs to Rally on Upbeat U.S. Q2 GDP Growth Data?).
Technology – Technology Select Sector SPDR ETF (XLK - Free Report)
With the global economy in decent shape, things are fine for tech stocks.This is because the chances of an imminent recession have lessened, a good omen for tech players, which are growth plays. At the same time, Fed rate cuts are likely in the fall while the European Central Bank (ECB) has already walked the easing route.A low interest rate situation doesn’t hurt tech stocks’ cash inflows. Instead, their cost of borrowing gets reduced, eventually boosting profit margins.
Bank – SPDR S&P Bank ETF (KBE - Free Report)
The banking corner of the broad financial sector has been an area to watch lately as investors have started to dig into the undervalued area. The probability of Donald Trump returning to the White House has risen lately, and the bets over Fed rates cut in September have also ramped up. Both are favorable for the banking sector. The robust second-quarter results of the banks have added to the strength.