The US economy: What’s next?

15 June 2023

Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

With the US economic recovery slowing to a crawl, there’s increasing evidence to suggest a recession could be on the cards next year, if not sooner.

The world’s most important economy grew a meagre 1.1% in the first quarter of 2023, down from 2.6% in the fourth quarter of 20221. This slowdown was unexpected by economists – raising concerns about the true health of the US.  

Consumer spending drove Q1 economic growth, up 3.7% from Q41. Government spending also provided a boost. However, business investment fell and a reduction in the build-up of inventory investment hit activity levels – the latter subtracting 2.3% from GDP growth1.  

Services and manufacturing

There’s a similarly mixed picture in terms of economic output. The latest data shows a services sector that’s performing solidly – it’s now grown for 34 of the past 35 months, rising to 51.9 in April2, according to the most recent services purchasing managers’ index (PMI) from the Institute of Supply Management (ISM).

However, it’s the nation’s manufacturers – which account for 11.1% of the US economy3 – that are lagging. The ISM manufacturing PMI was 47.1 in April, below the 50 level that indicates growth – and the sixth consecutive reading under 506. The weakness in manufacturing is broad-based, with only two sub-sectors – petroleum and coal products, and transportation equipment – showing improvement.

There’s also evidence to suggest manufacturers are now delaying placing orders amid rising economic uncertainty and higher prices – which is likely to lead to a slowdown in industrial production in the months ahead.

Labour market 

The labour market remains resilient, with 339,000 jobs added in May and an unemployment rate at 3.7% – close to near-historic lows. And while some sectors, like technology companies, have cut jobs, others – such as healthcare, professional and business services, and hospitality and leisure – have added them.

But signs of a slowing-down labour market are emerging. The number of job openings increased in April, but this is down from a peak in March 20224. Participation rates also held steady in May but, again, this is still below pre-COVID levels5. Average hourly earnings growth also slowed in May. And, given the expected economic slowdown, payroll growth is likely to weaken in the second half of the year – before possibly going into reverse, with workers being forced to accept cuts in pay. The unemployment rate is also predicted to rise above 4% in the coming months.

Is post-pandemic spending boom over?

Up to now in 2023, the US consumer has remained surprisingly resilient, but is the post-pandemic spending spree finally showing signs of slowing? Consumer spending actually increased in April, but it’s forecast to stall in the coming months due to a combination of rising interest rates, elevated inflation and increased unemployment.

Consumer expenditure growth is also projected to average just 0.3% in 2024 – and any slowdown in household demand, which accounts for around 70% of activity6, will no doubt hurt the US economy.

Ominous signs for property?

US house prices had declined for seven consecutive months, before rebounding in February7 and accelerating further in March. Mortgage rates have stabilised somewhat – but are still bouncing around 21-year highs8 – while a lack of inventory continues to support prices.

And while the housing market appears to be steadying, further economic uncertainty, mortgage rates consistently above 6% and tighter mortgage financing, could yet combine to chill the housing market in the months ahead.

Inflation battle eases off 

The slowdown in inflation will be a relief for the US Federal Reserve (Fed). The central bank has raised interest rates 10 times since March 2022, the latest a 25-basis-point hike in May – bringing it to a range of 5%-5.25%, its highest rate since 20079.

With both the main measures of inflation trending downwards – the US consumer price index (CPI) at 4.9% in April10, and ‘core’ CPI at 5.5%10 – the Fed is now expected to raise rates by an additional 50 basis points by the end of the year (pushing the target range to 5.5%-5.75%). However, with inflation forecast to moderate further still, the Fed may then start to cut rates in the latter half of 2024.

Is America heading into recession?

It’s this combination of higher interest rates, tighter financial conditions, easing demand, both domestically and overseas, and the decline of manufacturing that are all expected to play their part in the slowing down of America’s economic growth engine.

The US economy is forecast to grow by a below-par 1.2% this year11, and then shrink by 0.3% in 2024 – with many economists now pencilling in a mild recession into their forecasts for next year. 

And when America – the world’s largest economy, and major player in global trade and finance – slows down, the rest of the world takes note. As any pain felt in the US is likely to reverberate well beyond its borders. But only time will tell how painful any recession might be.

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