Talk of a recession began in early 2022, with searches for the term “recession” on the internet spiking more than 20% above the volume of searches during the outbreak. However, the labor market is expanding, inflation has subsided, and the unemployment rate is still incredibly low. 1 While the economy is stagnating, employment growth has slowed and GDP is growing faster than it could over the long term. According to the Government’s forecast, labor force growth will slow to about 500,000 jobs annually in the next years, with about 41,000 new jobs being created monthly to maintain full employment.
The tightening of monetary policy by the Fed may be required to maintain a tight labor market, but the “long and variable lags” of this process indicate that economic decision-making is already geared towards a slowdown. Financial markets are already more fragile due to the Fed’s tightened policy measures.
With lower inflation, steady growth, and the prospect that all of the rhetoric about a recession was just that talk, the US economy is starting to recover. Three possibilities are shown for the US economy: baseline (60%), return of inflation (20%), and the next recession (20%). Due to the Fed’s concentration on inflation, economic concerns are downplayed until it is too late, which causes the unemployment rate to rise to 5.2% by 2025. 2
Two primary questions will determine the near-term picture for consumer spending: what will happen when households exhaust their pandemic savings? Household savings in 2020 exceeded pre-pandemic projections by almost US$1.6 trillion; however, the majority of the money has already been spent. Even though many households still have more cash than they would like, how much will they spend when the economy slows down? While some people may continue to be prudent and hang onto their savings, others may have been accruing credit card debt and using their money for student loan repayment. According to the baseline Deloitte prediction, annual consumer expenditure growth would continue but at a slower rate of roughly 1.5%. 2
Over the next years, when consumer spending “renormalizes” and consumers start spending again on services, durable goods consumption will begin to decline as consumer services begin to rebound. Total consumer spending falls to a level that is marginally slower than the growth rate of household income, while expenditure on services increases at a faster rate.
Less than 40% of retired adults said their retirement was on track, and 25% said they had no retirement savings, indicating that retirement is still a major worry for many workers. 3 Although a minor recovery in real estate and mortgage is anticipated, demographic trends indicate that housing is unlikely to play a major role in driving economic growth in the near future.
Since the pandemic, business investment has surged, but investors have chosen their investments carefully. Between the pandemic and Q2 2022, investment in nonresidential investments decreased by almost 20%. This decline was mostly attributed to the move towards working from home, the decline in office and retail space, and internet purchasing. However, due to recent laws, there has been an increase in the development of nonresidential buildings, particularly industry and mining facilities. 4 The market is dominated by IT and transportation equipment, with equipment investment remaining constant. The need for software has kept intellectual property investment strong, with software and R&D accounting for most of it.
Given that the advantages of decreasing greenhouse gas emissions and the cost of climate change are not well captured by present measures of corporate profitability and the economy, future investment is expected to vary in response to incentives for climate change remediation. Long-term interest rates are rising, making financing investments more expensive, yet many nonfinancial enterprises have cash on hand. Through 2050, the International Monetary Fund projects that $3–$6 trillion in annual spending will be needed, with nonresidential investment spending projected to expand at a rate greater than GDP during the projection period. 5
Strong US exports are evident in foreign trade figures, even while growth in China and Europe is weaker. The United States of America maintains its historical level of global connectivity, with exports contributing 8.6% of GDP in 2022. 6
The federal government’s funding continues to pose a serious risk to the economy due to the possibility of a shutdown and a possible recession. The government will spend more during the next ten years due to the Infrastructure and Jobs Act and the Inflation Reduction Act, which will expand the economy’s potential but may not necessarily lead to a quicker rate of productivity growth.
The baseline prediction raises concerns about the US government’s capacity to borrow money at this rate because it predicts deficits to reach over $2 trillion by FY28. But the government might be in trouble if it can’t figure out how to cut back on borrowing and the deficit.
The labor market is still hot, with low unemployment and rapid job creation, even though it is slowing down. 7 With many older Americans probably retiring, the labor force participation rate for those under 65 has returned to pre-pandemic levels. In the post-COVID-19 environment, businesses that pay lower-skilled workers more and create incentives to recruit them will have a significant competitive edge.
Long-term interest rates are a source of uncertainty for financial markets. Some argue that this is because of factors such as declining rates of innovation, changing demographics, or the need for significant investments to mitigate the effects of climate change. According to the Deloitte projection, over the next several years, global savings will increase more slowly while long-term interest rates will likely be quite high due to the continued strength of the capital demand.
Although low inflation was recorded in June and July, which suggested a slowdown in the underlying trend, inflation is closer to the Fed’s target than anticipated. According to the estimate, the current inflation rate is “transitory” and will eventually decline, with the CPI inflation rate expected to drop below 3% by the end of 2024. 8
Conclusion and Recommendations
The economy of the United States was facing substantial headwinds that were indicative of a continued recession. On the other hand, the magnitude and intensity of this downturn are not completely predetermined. While the economy is going through these difficult circumstances, effective policy responses from monetary and fiscal authorities can significantly guide the economy through these difficult times. Furthermore, the intrinsic resiliency of the United States economy, which is driven by innovation, diversified industries, and an open job market, provides a base for optimism. 9
Fed Recommendations include:
- Balanced Monetary Policy: The Federal Reserve ought to balance the necessity to stimulate economic growth and the importance of controlling inflation.
- Targeted Fiscal Interventions: Government expenditure should be prudent in targeting sectors and groups most in need.
- Support for Innovation and Reshoring: There is potential for long-term growth to be driven by fostering innovation and supporting manufacturing revival.
- Consumer Confidence Enhancement: Measures that increase consumer confidence have the potential to promote expenditure and accelerate the recovery process.
- Global Engagement: Contributing to stabilizing global economic conditions by participating actively in international trade and collaboration is possible.
The capacity for recovery and growth remains robust, despite the fact that there is a possibility of a downturn occurring in 2024. This capacity is dependent upon strategic policy decisions as well as the inherent positive characteristics of the United States economy. Optimism combined with actions that are grounded in reality, has the potential to lessen the impact of the economic downturn and smooth the way for a resilient economic future. 10
- US Economy: https://www.stlouisfed.org/publications/regional-economist/2023/nov/slower-gdp-growth-falling-inflation-us-economic-outlook-2024[↩]
- US Economy: https://www2.deloitte.com/us/en/insights/economy/us-economic-forecast/2023-q3.html[↩][↩]
- US Economy: https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf[↩]
- US Economy: https://economics.td.com/us-business-investment[↩]
- US Economy: https://www.imf.org/en/Blogs/Articles/2022/08/18/public-sector-must-play-major-role-in-catalyzing-private-climate-finance[↩]
- US Economy: https://www2.deloitte.com/us/en/insights/economy/changes-in-globalization.html[↩]
- US Economy: https://www.chicagofed.org/publications/chicago-fed-letter/2023/491[↩]
- US Economy: https://think.ing.com/articles/us-inflation-2-percent-could-soon-head-into-sight/[↩]
- US Economy: https://www.jpmorgan.com/insights/outlook/economic-outlook/economic-trends[↩]
- US Economy: https://www.federalreserve.gov/monetarypolicy/2023-03-mpr-summary.htm[↩]
