This is a sample of our latest quarterly US Economic Outlook, originally published on 21st March 2024. Some of the forecasts contained within may have changed since publication. Access to the complete report, including detailed forecasts and near to long-term analysis, is available as part of a subscription to our CE Advance premium platform or to our dedicated US Economics coverage.

Although we expect GDP growth to slow to a below-potential pace over the next few quarters, we then anticipate a pick-up late this year, as monetary policy flips from a headwind to a tailwind. Our forecasts are based on the assumption of no meaningful changes in government policy. But a Donald Trump victory in this November’s presidential election could usher in a new trade war and restrictions on immigration, both of which might lead to a resurgence in inflation.

• Although we expect GDP growth to slow to below potential over the next few quarters, we then anticipate a pick-up starting later this year, as monetary policy flips from a headwind to a tailwind. (See Chart 1.) Our forecasts are based on the assumption of no meaningful changes in government policy. But a Donald Trump victory in this November’s presidential election could usher in a new trade war and restrictions on immigration, both of which might lead to a resurgence in inflation.
• Despite the tightening in monetary policy into restrictive territory, GDP growth accelerated last year, as excess savings and a greater prevalence of fixed-rate debt cushioned the impact on households. Furthermore, that pick-up in growth was accompanied by an easing in inflation, as the supply side of the economy expanded at an even faster pace.
• The supply-side surge in productivity growth appears to be mostly a cyclical response to tight labour market conditions, with firms boosting output by improving the efficiency of their existing workers. (See Chart 2.) Moreover, within the next couple of years, we expect that cyclical effect to be compounded by an AI-related structural boom in productivity. Thanks to that coming boom, we expect the economy to grow by 3% in 2026 without sparking a rebound in inflation.

• With the impact of higher interest rates evident in rising household delinquency and corporate bankruptcy rates, a near-term recession can’t be ruled out entirely. Falling commercial property values, particularly for offices, will remain a threat to regional banks.
• Nevertheless, banks are no longer tightening lending standards as aggressively. (See Chart 3.) Moreover, the nascent bubble forming in equities and the rebound in house prices will translate into favourable wealth effects for households, helping to offset the fading boost from excess savings.
• With most measures of labour market slack returning to pre-pandemic levels, we expect nominal wage growth to fall well below 4% this year. (See Chart 4.) 

• When combined with the acceleration in productivity growth, that should be reflected in a more marked decline in labour-sensitive core services inflation. Despite the disappointment to start the year, we still expect core inflation to resume its downward path soon. (See Chart 5.)
• We expect the Fed to cut interest rates by 100bp this year, beginning in June, with an additional 100bp of cuts next year, taking the fed funds rate to a low of 3.25% to 3.50%. (See Chart 6.) In contrast, the Fed and markets expect only 75bp of cuts this year.

• The election outcome is still too close to call. (See Chart 7.) Trump’s plans for a 10% universal tariff and 60% tariffs on Chinese imports would likely be more disruptive than his original trade war, boosting inflation. With the CBO’s estimates pointing to much stronger population growth than the official figures show, post-election restrictions on immigration could also boost inflation. (See Chart 8.)

Sources: Refinitiv, Federal Reserve, CE

• Given the higher post-covid debt burden, which raises the risk of a UK-style adverse reaction in markets, we don’t expect either candidate to push for any large-scale deficit-financed stimulus. That said, both would seek to extend most of the original Trump tax cuts, worth 1% of GDP, which are scheduled to expire at end-2025.