The first half of 2024 was marked by two distinct periods. During the first few months of the year, the US economy showed few signs of weakness. Consumption had even picked up. The downward trend in inflation also came to a halt at the start of the year.
Then, from April onwards, the economic data showed a clear weakening in consumption, and price indicators signalled that the disinflation phenomenon was still very much present. Attention was increasingly focused on the health of consumers, given the disappointing retail sales reports for April and May and the many warnings from businesses about the challenges facing consumers.
The “soft landing” scenario
To date, the idea of a ‘soft landing’ for the US economy remains the near-unanimous consensus of forecasters. This is a situation in which economic growth decelerates but does not turn negative, inflation continues its downward trend, and the Federal Reserve gradually lowers interest rates.
In this situation, it is no longer necessary for the Fed to pursue a restrictive monetary policy aimed at slowing the economy in order to bring inflation back to the 2% target. The longer the US central bank keeps rates at these economically restrictive levels, the greater the risk of causing more economic damage than is necessary. Recently, the Fed has shifted its focus to its second mandate, which is the pursuit of full employment.
In recent weeks, economic data releases have continued to signal a slowdown in economic growth. These include weak business confidence indicators in the services sector, rising unemployment claims and falling consumer confidence. The increase in the household default rate on all types of loans and the negative savings rate among people on lower incomes are two signs of particular concern, showing that part of the US population is beginning to have difficulty making ends meet.
Towards moderate rate cuts
That said, there is little evidence to date that the current economic slowdown will deepen into recession. Other data that measure the health of the consumer show that, ultimately, the US consumer is staying afloat. Income growth after inflation remains the main driver of household spending. And household spending is still growing, by between 1% and 2% year-on-year. What’s more, the burden of household debt remains quite reasonable and is close to a 50-year low. In aggregate, Americans are spending just 10% of their disposable income on monthly repayments. Added to this is a labour market that remains robust overall, despite its recent slight weakening.
Barring an abrupt shock, US consumption–and therefore the US economy–should remain in an expansionary phase over the next few quarters, which supports the soft landing thesis for the economy and will pave the way for moderate rate cuts by the Fed in the coming months, provided inflation continues to normalise.
This article was originally published in .
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