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U.S. Quarterly Economic Forecast

Just Enjoy the Moment 

Date Published: June 18, 2024

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  • Global economic momentum gained a step relative to expectations but, even so, the Bank of Canada and European Central Bank began rate-cut cycles, marking the first G7 central banks to do so. 
  • U.S. exceptionalism will place the Federal Reserve as the last member to sit at this table. Although inflation data for May was better than expected, the central bank will maintain a higher “confidence” threshold given prior head-fakes.

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“Let’s just enjoy the moment” was Bank of Canada Governor, Tiff Macklem’s, response when questioned about further rate cuts immediately after cutting the policy rate for the first time this cycle. The policymaker clearly wanted to focus on the good news for an economy coping with the highest policy rate in over twenty years. The sentiment applies to the global economic outlook. With inflation broadly coming to heel and no widespread recession, the best-case scenario is unfolding for policymakers for economies that suffered through severe dislocations over the past four years. 

Chart 1 titled 'U.S. Lead Wanes As Peers Pick Up the Pace' shows growth in Real GDP growth for 2023 and TD Economics' forecast for 2024 and 2025, on a year-on-year basis for the U.S., Canada, U.K., and Euro Area. The chart shows that the magnitude of economic outperformance observed in the U.S. for 2023 is expected to narrow in 2024 and 2025. However, the U.S. will likely remain as the growth leader through 2025.

The European Central Bank joined the Bank of Canada in reducing interest rates alongside cooling inflation. Eurozone growth had also surprised to the upside in early 2024, albeit from low expectations. Nonetheless, forecast revisions are now leaning toward upgrades, as the prospect of lower interest rates creates some optimism that a floor can be maintained under economic momentum. Over time, this should help narrow the U.S.’s growth advantage (Chart 1). However, the risk of an uptick in inflation from geopolitical tensions or solid domestic labor markets remains ever-present. 

China also exceeded forecasters’ expectations in the first quarter, leading to an upgrade to 2024 GDP. With the 5% growth target almost assured, we doubt the government will provide another dose of stimulus beyond the special long-dated bonds already issued. Ultimately, China’s aging demographics and restructuring of the economic drivers will maintain a slowing growth trajectory as the years progress. But for now, global growth is expected to remain steady at 3% this year and next.

Geopolitical risks are top of mind. Not just current conflicts in Ukraine and the middle east, but also the return of broader tariff action in the United States. This would weigh on growth as it has in the past. Government budgets are also an area to watch. With the pandemic expanding spending, the normalization of budget balances remains incomplete, and any abrupt adjustment would present a downside risk to growth. 

U.S. living its best-case scenario

Broadly speaking, our U.S. outlook is unchanged versus last quarter. Economic growth this year is expected to nearly match 2023’s pace, at 2.4%. However, this is partly due to a very strong 4% hand-off in the second half of 2023, which has boosted the 2024 average. By the end of this year, we expect growth to slow to 1.7% on a Q4/Q4 basis, as the longevity of higher interest rates create more weight under the normalization of savings and job markets. 

Chart 2 titled 'U.S. Inflation Progress Has Slowed in 2024' shows the 3-, 6-, and 12-month (annualized) rates of change on core PCE inflation. After cooling through 2023, progress on the inflation front has slowed more recently, with both the 3- and 6-month rates of change experiencing notable upticks at the beginning of the year. Meanwhile, the 12-month rate of change has hovered around 3% since the end of 2023.

One key change made to the forecast relative to last quarter was a reduction in the speed of interest rate cuts, with a total of eight rate cuts by the end of 2025, versus a prior view of eleven. Why the change? Progress on inflation has been slower (Chart 2), the economy has been more resilient and we suspect the neutral interest rate is likely a touch higher due to a shift higher in potential economic growth (for more details see report).  

This might seem at odds with a seemingly slow start in the first quarter, with growth of only 1.3% annualized. However, a drag from net exports and an inventory drawdown obscured a sturdy 2.5% expansion in domestic demand. The details reveal there was less contribution from the consumer than we had expected, but a better showing from business investment. The outlook for business investment, is one of the key upgrades in our forecast with recent indicators showing more momentum on equipment orders and spending on intangible assets. 

The pace of consumer spending, however, looks like it’s finally bending. Overall household borrowing has slowed dramatically since the Fed started raising rates two years ago, and consumer credit growth, running at around 2%, is at its slowest pace outside of a recession. With pandemic-savings cushions largely exhausted, consumers are tightening their belts. Spending on durable goods, which are big ticket items like vehicles and furniture, has also cooled. 

However, the job market hasn’t quite gotten the memo. Hiring accelerated so far in 2024, enabled by much faster population growth than the official statistics captured, thanks to increased migration (see details). We have incorporated some of this upswing highlighted by the Congressional Budget Office into our population and payrolls forecasts. That said, hiring looks set to slow with recent data showing employer demand has normalized to pre-pandemic levels (i.e. the job openings rate). That should help turn down the heat on inflation trends in the service sector. However, core inflation on a year-on year basis is expected to remain a bit on the high side of the Fed’s comfort level through 2024 due to unfavourable base effects. We suspect the Fed will look through that to form a decision to cut rates at the end of this year (see table).       

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