US Economy – Growth on Track for Now…
The International Monetary Fund (IMF) has just released its April2024 Economic Outlook. According to the Washington-based multilateral agency, the U.S. is on track for 2.7% real GDP growth rate in 2024, driven by strong household spending and investment (with a fair amount coming from the federal government).
The big issue for the U.S. economy is inflation. The IMF forecasts U.S. inflation for 2024 at 2.9%, well above the Fed target. Chairman Powell has repeatedly stated that he will not lower interest rates until the Fed is confident that the “inflation rate is moving sustainably down toward 2.0%.” The most recent economic data, March retail prices rose by an unexpected 0.7%,indicating that the economy is still running hot.
While most attention is on retail and consumer prices, it is also worth noting that in March, the ISM Manufacturing PMI hit positive territory for the first time in 16 consecutive months. The ISM Services PMI has been in positive territory for 15 consecutive months and does not appear ready to slow anytime soon. Equally important, the data shows that the surge in immigration has significantly expanded the labor force, but has had little impact on wages, which remain in positive territory (growing at 3.1% in March).Moreover, labor markets are still tight with unemployment at 3.8% in March.
This takes us back to the Fed. The worst thing that the U.S. central bank could do is to prematurely cut rates and have inflation bounce back. Additionally, both Biden and Trump economic platforms indicate that more money will have to be printed to finance large future budget deficits; growing money supply through the issuance of a massive amount of Treasury bonds will add to inflationary pressures. And, both Biden and Trump are talking about raising tariffs, which means prices will go up for many Chinese goods that are not easily replaceable. All of this leaves the Fed to hang tough on inflation, which translates into a stingy approach to rate cuts. We think that June and July are off the table for interest rates cuts and chances are increasing that there will no cuts in 2024.
