US Chartbook: Solid as a rock
With growth remaining resilient and disinflation accelerating, odds are higher than ever that the US economy manages to achieve a much-desired soft landing. A more balanced, but still robust labour market only adds to this view, while the Federal Reserve should not be too far away from finally starting its rate cutting cycle. Thus, everything appears to be set for a best-case scenario. However, risks regarding growth, inflation and also (geo-)politics must not be overlooked, uncertainty does therefore prevail also in times when stars are seemingly aligning perfectly. We want to use the exciting current scenario to release a freshly updated edition of our US chartbook.
Please download the chartbook by clicking on 'Download Attachment' to your right.
Growth remains solid despite persistent headwinds
Following strong growth in the year 2023, the US economy showed no signs of a noteworthy slowdown also in the first half of 2024. While growth slowed to a still reasonably solid 1.4% (qoq, annualized) in the first quarter, an upside surprise lifted it to 2.8% in the second quarter (consensus: 2%). Strong consumption and investment continue to be the main driving factors behind the US-resilience. In comparison, similar to the first quarter, net exports were the main factor dragging on growth also in the second quarter. This likely reflects a combination of strong demand for imports from within the US on the one hand, and weakish international demand for US-exports amid a subdued global economic environment on the other hand.
Regarding the economic outlook for full-year 2024, consensus estimates currently forecast a growth rate of 2.3%. Considering that growth was 2.5% in 2023, the US economy thus appears to be on its way to another year of robust growth. This comes despite the fact that not much has changed regarding the headwinds that the economy must face. Interest rates are still high, given that the Fed has not started its cutting cycle yet. High rates eventually cooling down economic activity in a noteworthy fashion remains a crucial risk for the US economy. Inflation persistence is another source of uncertainty. While inflation dynamics looked much more favourable in the second quarter compared to the first quarter, a resurgence of a more sticky price-momentum cannot be entirely ruled out. The same holds true for a sudden slump in labour market conditions. As the next section shows, the labour market has become more balanced over the recent quarters, but risks regarding a shift to the worse (and potential implications for growth) must still be considered. Last but not least, the political outlook is another main source of risk. A second presidency of Donald Trump, which is perceived as a likely outcome of the presidential elections in November, is linked to a variety of risks regarding economic conditions in the US. More information on potential implications of the US-elections on the US-macro outlook (but also on equity markets) can be found in our recent publication What's Hot? – 2024 United States presidential election. Thus, risks for the US economy are still manifold. However, as the next sections will show, many factors actually developed in favour of the US, which allows for a constructive outlook on future developments.
Labour market conditions are becoming more balanced
Over a prolonged timeframe after the outbreak of the COVID-19 pandemic in early 2020, the US-labour market showed signs of being historically tight. The job openings rate, a popular measure of labour market tightness, remained elevated for a substantial timeframe after the onset of the global health crisis, implying that employers had troubles to fill open positions with qualified personnel. A tight labour market poses upside risks for inflation, as it can cause upside pressure on wages. This is why data on the labour market was carefully scanned for signs of more balanced dynamics by both financial markets and policymakers. Currently, it seems as if the labour market did indeed find into a more balanced state over the last months. As the chart below indicates, the job openings rate has been creeping steadily towards it pre-pandemic levels, reaching 4.9% in June 2024 (February 2020: 4.4%). What is more is that the unemployment rate, while initially spiking at the beginning of the global health crisis, returned to pre-COVID-19 levels comparatively fast (June: 4.1%). Such a decrease in the job openings rate, coupled with a low and stable unemployment rate, is very much in line with the achievement of a soft landing (i.e., a reduction of inflation without a big slump in economic activity).
Given the current developments, upside pressure on (core services) inflation stemming from strong wage increases should subside moving forward. However, a newly arising question is whether the labour market runs in danger of cooling beyond the point of a more balanced state. Such an "overcooling" could for example imply a strong increase in unemployment and a turn for the worse in other pockets of the labour market. Such a development could in the end threaten the current resilience of the US economy. As of now, there are no signs for such a structural shift visible, the labour market still appears robust, despite some recent softening. Ultimately, it remains to be seen whether the labour market will in the end stabilise at a new, more balanced equilibrium, or whether it will continue to cool down amidst an environment of high interest rates. A sudden slump in labour market dynamics, while not our baseline scenario, does therefore remain a downside risk for the US economy worth observing.
Inflation momentum turned for the better in Q2
During the making of the last edition of our US Chartbook (see here), both CPI and PCE inflation measures clearly indicated a resurgence of US-inflation during the first quarter. This was especially astonishing as the second half of 2023 was characterised by a gradual decrease of inflation dynamics towards the 2% target of the Federal Reserve. Moreover, the resurgence of price pressure observed between January and March was relatively broad-based, ultimately raising the question whether the observed uptick in inflation was a symptom of a structural shift in price dynamics. However, inflation data soon turned for the better again, providing evidence that the distortions of the first quarter were noise rather than signal. While April-inflation came in only a tad more muted than the previous months, it was data for May and especially June that revived the hopes in disinflation, as the momentum of both (core) CPI and PCE inflation came in around or even clearly below the inflation target (see chart).
Data from the second quarter therefore confirmed our communicated view that we do not see the disinflationary path in the US endangered in its entirety. However, caution is still warranted. As the first quarter showed: A quarter alone does not make a trend. The outlook on inflation in the US still remains uncertain and there is still some ground to cover until the target is sustainably reached. Financial markets and policymakers will therefore continue to carefully assess data on inflation as it is being released. Overall, the inflation picture in the US does nevertheless look much more favourable today than it did just three months ago.
Fed - everything appears set for a first cut in September
Optimism that the first rate cut by the Federal Reserve comes closer has increased over recent weeks. Stronger than expected disinflationary momentum after a surprising resurgence of inflation during the first quarter of the year, puts the Fed in a more comfortable position at this point in time. The learning from the first quarter, however, is that central banks might want to be patient in declaring victory over inflation. In that spirit, a rate cut at this week's meeting in late July is not very likely. Some signals that September could be the date, conditional on data following expectations, are possible though. Interestingly, interest rate markets have jumped the bandwagon quite eagerly and flipped from a rather hawkish perspective (none to one rate cut in 2024) to a rather dovish perspective of rate cuts in September, November and December. This shows that financial markets understand the Fed's reaction function, even if we think that a more patient approach of one rate cut per quarter is a better reflection of where inflation and the economy are heading.
Conclusion
Summing up, it can be concluded that a soft landing is still a very likely scenario for the US economy. With growth remaining resilient, even managing to surprise to the upside most recently, and disinflation gaining pace during the second quarter, the two most crucial factors for such an economic outcome are currently present. Additionally, the more balanced state of the labour market should allow for further disinflation moving forward, while it is not showing any structural cracks that could significantly dampen growth in the near term. The rate cutting cycle by the Federal Reserve, which is expected to start in September, could in the longer-term further support the US business cycle.
Multiple circumstances pose a potential risk to the soft landing scenario mentioned above. The sustainability of the current economic resilience is one of the most important uncertainties that the US economy is currently facing. A sudden slump in economic activity, caused by interest rates being too high for too long or other adverse factors cannot be ruled out entirely. Similarly, a surprising deterioration of labour market conditions would be another factor that could amplify an economic downturn. Lastly, despite some recent positive data, the uncertain inflation outlook will remain a key factor also in the quarters to come, pronounced changes in price momentum have the capability to alter the economic outlook of the US.
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Markus TSCHAPECK
Austria Markus studied economics at the Vienna University of Economics and Business and at Tilburg University. He joined Raiffeisen Research's Economics, Rates & FX team in late 2022 after multiple prior internships in the banking industry. Due to his academic background, he puts his main focus on the quantitative and qualitative analysis of global economic developments. Beside his interest in economics and finance, Markus is particularly enthusiastic about strength sports and football.
Franz ZOBL
Austria Franz joined Raiffeisen Research's Economics, Rates, FX team in 2020 primarily focusing on US monetary policy, benchmark yields and EUR/USD. Prior to joining RBI, he worked as a research economist in the financial sector. He holds a PhD from the London School of Economics and studied at the Vienna University of Economics, the University of Vienna as well as Tilburg University. He is a published author within the field of macroeconomics and has a passion for economic history.
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