Economic outlook for the US - Q2 2024

US growth has proven to be remarkably resilient despite the aggressive monetary tightening delivered by the Fed. However, we expect growth to slow this year, primarily on the back of softer domestic consumption and constrained business investment. But we see no signs that the economy is in danger of rolling over, particularly given the recovery that is starting to be seen in housing investment. Accordingly, we expect the Fed to deliver its soft landing this year.

Growth set to slow in 2024, but Fed to achieve its goal of a ‘soft-landing’

Despite the strong growth performance seen in 2023, we expect to see growth moderating over 2024, with Q1 expected to show growth slowing relative to Q4 and for this slowdown to continue into Q2. A significant drag on activity will be subdued capital expenditure, an overhang of high inventory levels, and weak foreign demand, which will limit any boost to growth arising from the export sector. The growth boost provided by government initiatives such as the CHIPS Act will also increasingly fade. But perhaps the most significant growth headwind will be slowing consumption, with signs already appearing that the strength of spending seen last year is unsustainable. But there are no signs that growth is about to roll over and we no longer see any risk of a recession.

Domestic consumption is already showing signs of softening

Retail sales held up well over 2023, but this strength in consumption is already weakening. With the bulk of excess savings built up during the covid pandemic now largely exhausted, spending will be much more determined by income growth, which will be significantly less than that seen in 2023. With personal consumption expenditure accounting for approximately 70% of US GDP, any softening in domestic spending is certain to act as a significant drag on growth. It is too soon yet to suggest that we are facing a serious downturn in consumer spending, but a continuation of the softer picture seen in Q1 looks unavoidable as we head into Q2.

Capital expenditure set to slow further

Capital expenditure enjoyed a significant boost in 2023 from the CHIPS Act. However, the benefit of this legislation has now been largely exhausted with real manufacturing spending growth over 2024 expected to be close to zero. The main reason for this is the continued high cost of corporate finance, a direct consequence of both the Fed’s monetary tightening and last year’s banking crisis, which together continue to see banks pulling back from lending to the corporate sector. There are no signs yet that this behaviour is materially changing and as such we expect capex to remain weak over Q2.

Pace of jobs growth expected to start to slow

The Q1 boost in payrolls is not expected to continue into Q2; indeed, the February payrolls report has already seen the trend in payrolls move back in line with NFIB hiring intentions, which have been signalling for some months that high interest rates and tighter credit conditions are forcing small firms – which employ around half of the US workforce – to cut back on labour costs. At the same time, we are seeing leading indicators of layoffs and redundancies rising, meaning that trends in both hiring and firing are worsening at the same time. Accordingly, we expect private payroll growth to continue to slow over Q2 and do not rule out the possibility of a drop in private sector jobs being seen over the summer.

Wages growth to soften

But it is wages growth that matters to the Fed, and this slowing in jobs growth will exert further downwards pressure on earnings growth, the key labour market consideration for the Fed when determining whether to cut interest rates. The Employment Cost Index (ECI) is the Fed’s benchmark for assessing wages growth, and we expect the slowdown that has been seen in the ECI over 2023 to continue in Q1 and into Q2. Taken together, we forecast the labour market as no longer presenting an impediment to lower interest rates from H2 onwards.

Inflation still on course to return to target this year

Disinflationary pressures have shown signs of slowing over Q1, although the February CPI numbers were less strong than were the January numbers. Part of the reason for these stronger pricing pressures can be attributed to stronger housing costs, although several non-housing services components are also showing signs of strengthening pricing pressures. However, the big picture is that inflationary pressures are still expected to soften, as slower wages growth, falling margins and normalising supply chains continue to exert downwards pressure on prices. Accordingly, as things stand, we expect core CPI to resume its downwards trend over Q2.

First Fed cut unlikely before end-Q3

The Fed remains in a data-dependent mode and the unexpectedly strong inflation and employment reports seen in January and February have ruled out any near term cut in interest rates. However, our forecasts of core CPI resuming its downwards trend in Q2 and for the labour market and wages growth to continue to soften, leaves the door open for the Fed to potentially cut rates in Q3. However, the over-riding need not to get the inflation argument wrong again leaves the FOMC in an ultra-cautious mode and therefore we expect a first rate cut to be pushed back now to at least September.