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US Chart Book

US Chart Book

Economic growth to remain muted in H2

The incoming activity data now show clearer signs of weakness, particularly in the most interest-rate sensitive components of spending. But there are still few signs of that moderation morphing into a recession. The rise in mortgage rates has weighed on mortgage demand and is now reflected in weaker housing activity, with housing starts falling back over the past few months. The latest survey measures of firms’ capex plans suggest that growth in business equipment investment has slowed sharply. But with easing shortages set to support spending on autos and help firms rebuild inventories, and lower inflation likely to mean that real incomes begin rising before long, we still think the economy will avoid a recession in the coming quarters.

21 July 2022

US Chart Book

Recession fears overdone

The surge in interest rates, plunge in the stock market and weakness of consumer confidence have fuelled fears of an impending recession, but there is still little sign of that in the incoming economic data. The coincident indicators used by the NBER to identify economic turning points show continued growth. The strength of payroll employment growth, which is averaging close to 400,000 per month, is particularly hard to square with claims that a recession is imminent. Admittedly, with inflation rampant, that is likely to keep the Fed raising interest rates aggressively, including another 75bp hike in July. But with underlying demand still strong, a slowdown in growth is still the more likely outcome.

23 June 2022

US Chart Book

Economy powering ahead

The strength of the hard activity data for April refutes the recent message from financial markets that the economy is at risk of imminent recession. The solid gain in control group retail sales, together with upward revisions to past months leaves the underlying trend in consumer spending looking much stronger. Meanwhile the continued rebound in manufacturing output, in particular the recovery in vehicle output to the pre-pandemic level, illustrates how the gradual easing of supply shortages is supporting a rebound in production. With signs that core inflation is still running far too hot, the continued strength of economic activity supports the Fed’s decision to press ahead with 50bp rate hikes at the next couple of FOMC meetings. Nevertheless, we still expect a drop back in inflation later this year, alongside signs of a slowdown in economic activity will prompt the FOMC to shift back to 25bp hikes by the fall.

18 May 2022
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US Chart Book

Better news on inflation won’t stop the Fed

While we are confident that inflation will fall back sharply in the second half of this year, that will not stop the Fed delivering a series of 50bp rate hikes at its upcoming meetings. Although gasoline prices have stabilised this month, though the surge in natural gas prices in recent weeks means headline inflation won’t fall by much, if at all, in April. There are clearer signs that core inflation has peaked, however, with easing supply constraints cooling upward pressure on goods prices, as well as tentative signs that the most cyclical components of CPI are no longer accelerating. The latter echoes the message coming from the labour market, where a wide range of evidence suggests that shortages have stabilised in recent months. Even so, with core inflation not on track to fall all the way back to the 2% target any time soon, we think the Fed will still need to follow through on its plans for a series of aggressive rate hikes. Later this year, it should become clearer that economic growth is running well below potential and those cyclical inflationary pressures will begin easing more markedly, freeing the Fed to switch back to 25bp increases from the September meeting onwards. French election Drop-In (21st April, 09:00 BST/16:00 SGT): Join our Europe and Markets economists the morning after the crucial Macron vs Le Pen debate for a briefing about risks around the presidential election, including to the French economy, the European Union and the euro. Register now.

US Chart Book

Inflation to fall sharply in H2

While the war in Ukraine and sanctions on Russian oil mean energy prices will remain elevated and push headline inflation above 8% in March, it will still fall sharply later this year. Energy inflation and inflation in categories that saw intense shortages last year will drop as we reach the anniversary of last spring’s big increases. Used motor vehicle prices are already declining and there are broader signs of easing shortages, with the backlog of container ships waiting at US ports falling to a nine-month low. That should reduce some of the pressure on the Fed to tighten monetary policy aggressively at upcoming meetings. But with the more cyclically-driven categories of inflation, such as rent and food away from home still rising, we think the tightening cycle the Fed kicked off last week will need to continue well into next year, with rates reaching 2.75%-3.00% by end-2023.

US Chart Book

Better news on inflation is coming

The further rise in CPI inflation to 7.5% in January and hawkish comments from Fed officials have seen markets rush to price in a series of aggressive interest rate hikes this year. But recent weeks have also brought tentative signs that better news on inflation is coming. Although global energy prices continue to trend higher, base effects mean that the contribution to headline inflation is nevertheless likely to fall sharply soon. The 20% jump in auto sales and resurgence in goods trade, as shipping congestion has eased, suggests that upward pressure on goods prices is fading. And although the labour market remains exceptionally tight, conditions appear to be stabilising. Our composite indicators of labour and goods shortages, based on a range of survey and hard data, show improvement in recent months. The upshot is that the worst of the recent inflationary pressure may now have passed – in which case the pressure on the Fed to tighten policy aggressively should also begin to ease.

US Chart Book

Omicron impact short-lived

The surge in Omicron infections means more people were self-isolating in early-January than at any time since the beginning of the pandemic, although the impact that will have on employment and output remains uncertain. Furthermore, with cases now falling just as quickly as they rose, any effects will be quickly reversed in February. In contrast to earlier waves, the rise in infections hasn’t prompted as big a pullback in services activity, with fears of catching the virus lower than during previous waves. The far bigger factor this time is staff absenteeism, which we think will cause both payroll employment and manufacturing output to decline in January, although the impact should be mostly reversed by the end of the first quarter.

US Chart Book

Winter virus wave to slow economic momentum

The Omicron variant has supercharged the seasonal wave of virus cases sweeping parts of the US, adding to the existing headwinds to consumption growth over the coming months. In contrast to governments in Europe, however, there are still few signs of state or local governments moving to reimpose meaningful restrictions on activity and any voluntary pull-back in activity has, for now, been modest. We had already expected that, with real incomes falling and confidence slumping as the earlier fiscal support fades and surging prices take their toll, real consumption growth would slow over the coming months. The rapidly deteriorating virus situation, and the prospect of at least a temporary disruption in child tax credit payments, only add to the downside risks.

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