The US economy is booming – for now
According to the latest data from the Bureau of Economic Analysis, the US economy grew at an annualized rate of 4.9% in the third quarter of 2023, the fastest since the fourth quarter of 2021. Consumer spending, which accounts for more than two-thirds of US economic activity, was the main driver of growth, as higher wages and a tight labor market boosted households’ purchasing power.The US economy has also recovered from the Covid-19 pandemic downturn, with inflation falling to 3.7% from a 40-year high of 9.1% in June 2022 and unemployment close to a 50-year low. President Joe Biden has received little credit for the economic performance, however, as a Harris poll conducted for the Guardian showed that two-thirds of Americans believe the economy is worse than is being reported.
The risks are mounting – and so are the chances of a recession
Despite the impressive growth, the US economy faces several challenges that could derail the recovery. The most immediate threat is inflation, which has been driven by supply chain disruptions, labor shortages, energy shocks, and fiscal stimulus. The Federal Reserve has responded by raising the federal funds rate by 5 percentage points since 2022, reaching 6.25% in October 2023. This has increased the cost of borrowing for consumers and businesses, and could dampen spending and investment in the coming months.Another risk is the geopolitical situation, especially the war in Ukraine and the Middle East, which has caused oil prices to spike and disrupted global trade. The US is also involved in a geoeconomic confrontation with China, which could escalate into a trade war or a military conflict. These factors could hurt the US economy by reducing exports, increasing imports, and raising uncertainty.
A third risk is the weakening of consumer and business confidence, which could lead to a decline in demand and output. The cost-of-living crisis, which has eroded the purchasing power of many Americans, especially the low-income and vulnerable groups, is one of the main reasons for the loss of confidence. The resumption of student loan repayments by millions of Americans, which was postponed during the pandemic, is another factor that could reduce disposable income and consumption.
All these risks are interconnected and could create a vicious cycle of lower growth, higher inflation, and tighter monetary policy. The Conference Board, a think tank, predicts that the US economy will grow by only 2.4% in 2023, and then fall into a recession in 2024, with a negative growth of 0.8%. The World Economic Forum’s Global Risks Report 2023 also warns of the possibility of a “polycrisis” in the years ahead, as multiple crises in food, energy, debt, and disasters could overwhelm the global system.
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The outlook is uncertain – and so is the policy response
The US economy is facing a critical juncture, as the forces that have propelled its growth in the past may not be sustainable in the future. The Fed faces a delicate balancing act, as it tries to contain inflation without triggering a recession. The Biden administration faces a political challenge, as it tries to pass its ambitious social and infrastructure spending plans amid a divided Congress and a skeptical public. The US also faces a strategic challenge, as it tries to maintain its global leadership and competitiveness in a multipolar world.The outcome of these challenges will determine the fate of the US economy in the next decade. The best-case scenario is that the US economy achieves a “soft landing”, where growth slows to a more moderate pace, inflation moderates, and the Fed eases its monetary policy. The worst-case scenario is that the US economy plunges into a “hard landing”, where growth turns negative, inflation spirals out of control, and the Fed tightens its monetary policy further.
The US economy is booming – but a nasty shock may be on the horizon. The risks are high, and the uncertainty is even higher. The US needs to prepare for the possible scenarios, and act accordingly. The stakes are too high to ignore.
Sources: tradingeconomics.com | conference-board.org | weforum.org | jpmorgan.com