US defies expectations of an economic slowdown

What’s happened?

Initial GDP estimates from the Bureau of Economic Analysis (BEA) put fourth-quarter growth at 3.3% (quarter on quarter, annualised) and full-year growth at 2.5%. These exceeded our estimates of 1.6% and 2.4% respectively, mainly owing to higher than expected additions from net trade and government consumption. Owing to resilient private consumption and signs that the deterioration in household debt is stabilising, we will raise our 2024 real GDP forecast to 1.8% (from 1.3% previously).

Why does it matter?

The “soft landing” that the Federal Reserve (Fed, the central bank) desires is starting to come into view, which will bolster business and consumer confidence, and support recent growth in asset prices. Although we have long expected a soft landing for the US economy, the upgrade to our forecast is substantial, with quarterly growth hitting a low of 0.5% (annualised) in the third quarter (up from a previous low of 0.1% in the second quarter).

In addition to strong momentum in late 2023, this more optimistic view is also linked to a slightly improved outlook for consumer credit. The percentage of consumer loans moving into delinquency has been rising steadily from a low point at end-2021. However, we believe that this increase may soon level off, as borrowers have recently become more cautious. Moreover, despite tighter lending conditions to firms, fixed investment rose across all measures in the fourth quarter (including real estate, equipment and intellectual property), suggesting that there is more room for investment growth in 2024.

This rapid GDP growth would normally suggest that the Fed would turn hawkish again, as it expects renewed inflationary pressure. Although this could materialise in 2024, for now, inflation continues to ease. This fits with our forecast that the Fed will start cutting rates in June, supporting growth later in the year. The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, was up by 2.7% year on year in the fourth quarter, from 3.3% in the third quarter.

Other inflation measures, notably the consumer price index (CPI), continue to run slightly above these levels, but have generally been trending down. We have therefore raised our forecast for headline CPI growth in 2024 from 2.4% to 2.5% —a more modest shift than the change in our GDP forecast. This assumes that inflation will continue to ease this year, albeit at a choppier pace, as we have previously noted.

What next? 

We will revise up our real GDP growth forecast for 2024 to 1.8%, assuming that real private consumption growth slows, but remains positive. However, if the disinflation trend is interrupted, this would prompt the Fed to maintain its tight stance for longer, weighing on growth.

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