U.S. Economy: robust so far, but cooling ahead

The U.S. economy expanded a fairly solid 0.5 percent in the second quarter of 2023 compared with the previous quarter (annualized 2.1 percent). While private consumption increased only moderately by 0.4 percent, business investment expanded strongly by 1.5 percent. This strong growth was probably also due to massive government subsidies for semiconductor factories and renewable energy production. Residential investment continued the downward slide that began about a year ago. Interest rate hikes by the US Federal Reserve have made financing these investments more expensive. However, the bottom is now likely to have been reached gradually. No positive stimulus for the US economy came from foreign trade in the second quarter of 2023. In the wake of weakening global trade, both exports and imports were down, with exports declining even more sharply.

The performance in the first half of 2023 was solid, but the economy will now cool. I continue to be a bit more pessimistic in the near term than colleagues of mine. The U.S. economy should continue to expand solidly in the third quarter, albeit without much momentum. Private consumption is likely to increase slightly; this is indicated, for example, by retail sales, which increased at the beginning of the summer. Consumer sentiment has also improved recently. However, sentiment indicators are still well below pre-pandemic levels. Among companies, sentiment in the service sector is significantly better than in industry, where assessments of the business situation have deteriorated. The Purchasing Managers’ Index for industry remained well below the expansion threshold of 50 in July. In view of the weakening global economy and worsening financing conditions, industry will not provide any stimulus for the US economy for the time being. Stronger growth is not expected here again until 2024 and 2025, when the global economy is expected to grow at a slightly higher rate.

The US economy is also expected to expand moderately over the rest of the forecast period. Private consumption is likely to continue to grow steadily, but higher growth rates are not expected until the second half of 2024. Although the situation on the labor market is still good, it has gradually cooled somewhat. This trend is likely to continue. The unemployment rate will rise somewhat. Household consumption is also dampened because household savings accumulated during the pandemic have declined sharply. Business investment is likely to continue to grow, also in view of the government stimulus programs, but at a less dynamic rate than in the first half of 2023. The only moderate growth in private consumption and the less dynamic global economy will also leave their mark on business investment. Towards the end of 2024, gradually falling interest rates should improve financing conditions and stimulate companies’ willingness to invest.

Fiscal policy is unlikely to provide either a tailwind or a headwind for the U.S. economy over the forecast period. The Congressional Budget Office expects the federal budget deficit to remain above five percent of economic output until 2025. The Inflation Reduction Act passed in the summer of 2022 and the Chips Act for the expansion of semiconductor production and renewable energies are expected to continue to have a noticeable positive impact on the economy. Monetary policy has rapidly become more restrictive since spring 2022, which has also curbed inflation expectations in particular. Inflation has also been gradually reduced thanks to a calming in energy and food prices in the fall and winter. In June and July, both headline inflation and core inflation, which excludes energy and food prices, were around the central bank’s average two percent target. However, in view of the somewhat higher oil price and nominal wage increases again, inflation is likely to rise again a little for the time being. Against this background, the U.S. Federal Reserve will probably raise interest rates once again by 25 basis points and then leave them at the current level until the end of the year. The first slight interest rate cuts can be expected from spring 2024.

All in all, the US economy will probably expand by only 1.7 percent in the current year. Growth in the US economy will also be only moderate in 2024 and 2025. Growth rates are likely to be 1.5 and 1.9 percent. Inflation will still be significantly elevated on average in 2023, but will be within the central bank’s target range in 2024 and 2025.

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