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Will this continue heading into 2025?
The US economy has been surprisingly resilient over the past two years. This week, we received the latest report on the health of the US economy, the preliminary release of the Q2 national accounts. The key takeaway from the national accounts was that the US economy continues to track towards a soft-landing.
Turning to the details, US real GDP rose at a solid 2.8% quarterly annualised pace in the June quarter, double the pace recorded in the March quarter, but softer than the strong growth seen in the second half of 2023. The Q2 outturn eclipsed the consensus expectation for 2.0% growth and was also higher than QIC’s forecast for 2.4% growth. Over the past year, the US economy has expanded by a strong 3.1%.
The robust growth seen in the US during the June quarter was broad based. Real consumer spending rose solidly (+2.3% qsaar from +1.5% in Q1), business investment was strong (+5.2% qsaar from +4.4%) led by machinery and equipment spending, while government spending picked up over the quarter (+3.1% qsaar from +1.8%). Inventory re-stocking added to growth over the quarter, although this was offset by a pick-up in imports.
Notwithstanding the robust growth seen in Q2, we continue to expect the US economy to slow over the remainder of 2024 and into 2025. There are a few key reasons to expect a slowdown will emerge. Fundamentals suggest the US consumer is unlikely to be able to sustain the growth seen in Q2. Unlike the situation in Australia, US consumers have largely run down the excess savings buffers built-up during the COVID period, removing an important source of support. Income trends are also expected to moderate as labour market conditions and wage growth continue to ease. Some pockets of fragility are also emerging among low-income consumers given the elevated interest rates, with credit card write-offs rising to the highest rate since 2011. The softer consumer fundamentals, coupled with lower immigration flows, suggest consumer spending should slow to a more moderate 1½% pace over coming quarters.
Other sectors of the economy are also expected to moderate in coming quarters. While trends towards higher AI-related and energy transition investment are likely to remain, the higher cost of capital is expected to constrain business investment in other areas of the economy, particularly within the commercial office sector. Residential investment is also expected to remain weak given the current high mortgage rates.
Overall, we expect year-ended growth in the US economy will slow to around a 1¾% pace by the end of 2024 and remain around that pace during 2025. The more moderate growth environment should allow demand and supply to continue to move into better alignment within the economy, further easing inflationary pressures. QIC forecast the year-ended core PCE inflation rate to ease from 2.7% in Q2 2024 to 2.1% by Q4 2025.
The progress towards lower inflation during the June quarter, combined with signs emerging of better balance in the labour market, is likely to give the US Federal Reserve (Fed) greater confidence that inflation is on-track towards returning to its 2% target. With the Fed likely to begin focussing more on the downside risks to growth, we expect they will begin to ease policy rates in September. We expect a total of two rate cuts this year, four cuts during 2025 and a further three cuts during 2026. Removing the restrictive monetary policy settings will help the US economy to remain on its current soft-landing trajectory and help prevent a contraction in the economy.
However, one of the key uncertainties facing the US economy is the upcoming Presidential election. The news this week of President Biden withdrawing from the White House race has seen the Democrats and Kamala Harris receive a small boost in the polls, although former President Trump remains ahead. Our baseline forecast does not incorporate a Trump victory. However, should Trump prove successful in November and the Republicans gain a clean sweep of Congress, the risk is towards renewed trade protectionism, corporate tax cuts, lower immigration, a roll-back of the IRA, larger fiscal deficits and consequently higher inflation. Under this scenario, we would expect the US Fed to be more cautious in cutting rates, no doubt to the ire of President Trump. While the US economy currently remains on the soft-landing track, risks remain skewed to the downside given the political uncertainty that lies ahead.