US' inflation reduction slows as demand remains strong: S&P Global

Inflation reduction in the US has been slower than expected, while domestic demand and payroll growth remain robust, according to S&P Global’s US Economic Outlook Q3 2024. The base-case forecast for GDP growth is steady at 2.5 per cent for 2024, unchanged from March, with stable unemployment rate expectations.

A key change in the forecast since March is the slower pace of monetary policy easing, with a total of 125 basis points of rate cuts expected by the end of 2025, down from the previous forecast of 200 basis points. Real GDP growth is projected to remain at 2.5 per cent annually but is expected to slow to 1.8 per cent in Q4 2024, compared to 3.1 per cent in Q4 2023. The Fed's tight monetary policy and delayed easing are likely to cool economic activity.

Below-potential growth is anticipated to raise unemployment over the next few years, with inflation slowing despite recent surprises. A soft landing remains the most probable scenario through 2025, as per S&P Global.

The US economy has shown resilience, with Q1 2024 economic expansion at 1.3 per cent (annualised), though below Q4 2023's 3.4 per cent. Strong domestic demand is evident, with final sales to domestic buyers growing 2.5 per cent and private demand expanding 2.8 per cent. However, income growth lags behind spending growth, with consumers relying on credit and savings, depleting excess savings for all but the highest-income households. Delinquency rates on credit cards and auto loans exceed pre-pandemic levels, and higher interest rates have increased interest payments as a share of personal income. Consumer spending, especially on retail sales, is expected to decline further.

The manufacturing sector showed signs of a cyclical rebound in spring, with the Institute for Supply Management's New Orders Index and S&P Global Market Intelligence PMI entering expansion territory in Q1 but dropping below 50 in May.

The Fed is expected to wait for data supporting inflation consistent with its 2 per cent target before lowering the federal funds rate, likely not until late 2024. May inflation came in below the Fed's target month-over-month after four higher readings. The core Personal Consumption Expenditures deflator is expected to average 0.2 per cent monthly for the rest of the year. The first rate cut is forecast for December, with 100 basis points of cuts anticipated over 2025, bringing rates to 4 per cent-4.25 per cent by year-end.

With inflation below 3 per cent, the Fed may become more sensitive to labour market weaknesses. Job gains remain robust but have decreased slightly, with the unemployment rate rising to 4 per cent. Indicators show a decline in labour demand, with hiring plans slumping and consumer perceptions of job availability deteriorating. Wage growth is expected to decline towards 3.5 per cent by next year.

The Fed will focus on economic data to gauge inflation's influence on monetary policy and the resilience of domestic demand and the labour market. The economy's growth potential will limit spending increases, with fiscal policy impacts restraining GDP growth slowdown.

Risks to the 2024 growth forecast are nearly balanced, with upside risks from strong consumption and downside risks from elevated inflation and monetary policy impacts. Extraordinary risks include Middle East conflicts, heightened protectionism post-election, and potential inflation resurgence threatening monetary easing.

Fibre2Fashion News Desk (DP)