U.S. Economy: Still solid for the moment, but the slowdown will come

In the United States, gross domestic product grew by a solid annualized 2.0 percent in the first quarter of 2023 compared with the previous quarter. While consumer spending was up a robust one percent, business investment was up only slightly. In the case of residential investment, the downward trend that began a year ago continued at a slower pace. This development is probably also a consequence of the interest rate increases by the US Federal Reserve. Foreign trade provided positive impetus for the US economy in the first quarter of 2023; exports increased more strongly than imports.

The economic engine is now likely to stutter somewhat. Private consumption in particular will provide less support for the economy. In addition, consumer sentiment remains pessimistic, even if the low point of summer 2022 has been passed. Stress in the regional banking sector is also likely to weigh on economic development. Silicon Valley Bank collapsed in March and several other regional banks have since suffered a similar fate. Financing conditions for companies are therefore becoming more difficult. In view of these developments, companies have become more pessimistic – the Purchasing Managers’ Index for industry fell slightly below the expansion threshold of 50 again in May.

In the second half of 2023, the US economy is even likely to contract slightly. Private consumption is likely to decline somewhat. Although the situation on the labor market is currently still extremely good, it will gradually cool somewhat. The number of newly created jobs has been trending downward for several months; in June, however, 209’000 new jobs were still created; the unemployment rate remained at a low 3,6 percent. Household consumption is also being dampened by the fact that household savings accumulated during the pandemic have declined sharply. The problems in the banking sector will also continue to weigh on the U.S. economy; lending to businesses and households will probably decline even more than was already to be expected as a result of the interest rate increases. Against this background, business investment is likely to contract slightly. The weak domestic economy is also dampening imports. However, as exports will also increase only moderately due to the likewise weakening global economy, the trade deficit will decline only slightly.

Overall, economic policy is not providing any tailwind for the US economy. However, the Inflation Reduction Act, the infrastructure program and the Chips Act are having a noticeable positive impact on the economy. Monetary policy has rapidly become more restrictive since spring 2022. Inflation has been gradually reduced, also in view of falling energy and food prices in the fall and winter. But core inflation in particular, which excludes energy and food prices, remains in a range well above the central bank’s average two percent target. Against this background, interest rates are likely to be raised by another 25 basis points and then remain at the current level until the end of the year. Slight rate cuts are not expected until 2024.

All in all, the US economy is likely to grow by 0,9 percent this year. In 2024, the US economy is expected to recover gradually. I expect agrowth rate of 1,2 percent. Inflation will still be significantly elevated in the current year at 3,9 percent and will not fall below two percent until 2024.

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