Five top economic trends you’ll want to watch in the US
Coface North America economist Ruben Nizard has identified five major economic trends to watch in the United States.
The COVID-19 pandemic and its aftermath revealed cracks in supply chains, which experienced unprecedented bottlenecks and disruptions in the last couple of years. While the situation is returning to normal in 2023, this is due to lacklustre trade dynamics globally. Sources of uncertainty remain exceptionally high, including the reverberations of the war in Ukraine and increased geopolitical risks, which threaten to lead to geo-economics fragmentation, leaving supply chains vulnerable. Concerns over supply chain resiliency are pushing US businesses to consider reshoring, nearshoring, or friend-shoring. Policy actions also seem to move in that direction, as demonstrated by measures included in the Inflation Reduction Act adopted by the administration last year.
This remains one of the top concern in the US after it reached a 40-year high of 9.1% in June 2022. Inflation has nonetheless turned a corner since then, and has eased to 5.0% in April. The disinflation process is mainly driven by a reduction in energy prices as they declined from the peak levels reached after the Russian invasion of Ukraine last year, and a stabilization in core goods prices as supply chains recover from COVID-19 disruptions. Despite progress, inflation nonetheless remains above the Federal Reserve (Fed)'s 2% target, and services prices are still rising quickly, which could keep a floor on inflation.
In the last year, the Fed raised interest rates at the fastest pace in decades, as it tries to rein in inflation. Its resolve to bring it back to 2% target keep being tested: while it is still too high for the US central bank to declare victory, economic activity is showing signs of slowing, and the collapse of Silicon Valley Bank has highlighted increased financial stability risks. This has put the Fed in a delicate position, as it is facing a "trilemma" of taming inflation, managing financial stability, and considering the impact on employment. According to our forecast, this will prompt the Fed to pause its rate hiking cycle slightly above 5%, followed by an extensive pause that will maintain rates at restrictive levels for economic activity.
The collapse of SVB in March highlighted the lagged impact of monetary policy on the financial sector. Market stress over the state of the banking sector has somewhat subsided in recent weeks, but the full impact of these events is still playing out. In particular, we keep an eye on the impact on lending growth, as the recent turmoil may prompt banks to tighten credit further. This could lead to lower demand and slower economic activity, increasing the risk of a recession.
After a strong post-pandemic recovery, economic activity is showing signs of weakening due to higher borrowing costs and still-high inflation. The US is set to experience a period of low activity, while inflation remains stubbornly high this year. However, as Coface expected, the US economy has defied odds of a recession so far. Consumer spending, the backbone of economic activity (about 65% of GDP), is supported by dissaving, increased credit card balances, easing inflation, and a strong labor market promoting income growth. These factors could still help the economy narrowly avoid a recession in our opinion, but the risk remains high.
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