Cheng Shi, Chief Economist of ICBC International and Director of China Chief Economist Forum
ICBC International Senior Economist Zhang Hongwei
ICBC International Macro Analyst Xu Jie
The U.S. economy, as the vane of the global economy, has always attracted international attention for its growth fluctuations. In the first quarter of 2024, the U.S. economy grew at an annualized rate of 1.6% quarter-on-quarter, although the economy cooled more than expected, the fundamentals of the U.S. economy have not fundamentally deteriorated, the endogenous growth momentum remains relatively strong, and the total factor productivity has been quietly boosted with the help of scientific and technological innovations such as artificial intelligence. We expect that the US economic growth rate in 2024 will show a trend of high and then low, and the annual economic growth rate may be roughly similar to last year's level. Looking ahead, as inflation control enters the most important and difficult last mile, the core inflation pivot is higher than normal, and the U.S. monetary policy needs to seek a more sensitive and complex balance between growth and prices, and the timing of interest rate cuts will be more prudent. The direction of the Fed's policy will depend more on changes in the labor market. As the labor market reaches a new equilibrium in the second half of 2024, the unemployment rate will gradually climb. In response to this change, the Fed is likely to start a rate cut strategy at the end of the year, with one or two rate cuts expected in November or December, with rates ranging from 25 to 50 basis points.
Resilient Economy: U.S. economic growth is expected to remain strong in Q1-Q2 2024. In the first quarter of 2024, the U.S. economy grew at an annualized rate of 1.6% quarter-on-quarter, with a strong contribution from domestic demand, with an annualized growth rate of 2.8%, mainly due to the continued strong growth of U.S. consumer spending. Based on the Federal Reserve's latest forecast model, U.S. consumer spending is expected to contribute 2.38 percentage points to U.S. GDP growth. The core reason for the strength of consumer expenditure is that the "wage-price" spiral effect is still at work. Data from the U.S. Labor Bureau for the first quarter of 2024 shows that there are more than 8.8 million job openings in the U.S. labor market, while only 7 million to 7.5 million workers can enter the labor market. So, while the labor gap is narrowing and hourly earnings growth in the U.S. is starting to slow, the strong demand in the labor market is still supporting wage stickiness, which further supports household sector consumption levels. In addition, the contribution of U.S. residential and non-residential sector investment to GDP growth remained strong in parallel. Residential investment has contracted significantly since 2021, but from 2023 onwards, due to the contraction of new home supply, the recovery of the epidemic has led to the supply of new homes and existing homes unable to meet the demand boost, which has stimulated the real estate investment cycle. In terms of non-residential investment, affected by the 2021-2022 "Infrastructure Investment and Jobs" Act and the 2022 "Chips and Science" Act, the U.S. non-residential investment has strengthened significantly with active fiscal support, with fiscal support of US$1.2 trillion and US$280 billion, which will make the U.S. government investment significantly expand in 2023. From the perspective of long-term economic growth, the total factor growth brought about by the new round of AI technology innovation has brought strong support to the real economic growth of the United States. According to the latest research data from the Federal Reserve Bank of San Francisco, in the last quarter of 2023, the total factor productivity (TFP) of the United States increased by 2.62%. After taking into account various factors such as labor, capital, equipment utilization and working hours, the adjusted TFP growth reached 4.99%. This growth rate far exceeds the regular labor productivity metrics released quarterly by the Bureau of Labor Statistics. In addition, a comparison of data from the past few quarters shows that the total factor productivity of the United States has been growing for several consecutive quarters, indicating that the previous large-scale investment by enterprises has begun to have a significant effect. With the further development of AI technology, the increase in automation, the transformation of work patterns, and the implementation of industrial policies, it is expected that the total factor productivity of the United States will form a strong support for the growth of the United States.
Better-than-expected but orderly: U.S. growth is expected to slow down in Q3-Q4 2024. Judging from the data of the first quarter, the internal vitality of the US economy has not been significantly damaged, mainly due to the large drag on inventories and trade. In the first quarter, inventory changes weighed on growth by -0.4 percentage points, while net exports contributed -0.9 percentage points to growth, mainly as higher imports, mainly from increased demand for consumer goods, offset the positive contribution of exports. In the medium term, although the long-term labor productivity in the United States is rising from a structural point of view, the probability of a decline in the growth rate of the US economy in the next three to four quarters is increasing cyclically. There are three specific reasons: First, the real growth level of household disposable income is slowing down. High interest rates are driving up household debt levels, which is further eroding disposable income in the household sector. Judging from the data in February 2024, the real growth rate of disposable income in the US household sector has turned negative, and recorded zero growth in January. We expect the lag effect of real disposable income to be felt in March-April. Second, in the medium to long term, the U.S. labor market is moving to a new equilibrium level. Although there is still a gap in the current U.S. labor market, a large number of illegal workers have entered the U.S. since mid-2023, and the size of this group of workers is expected to be about 2.4 million to 2.7 million. It usually takes 6-8 months for illegal workers in the United States to obtain legal labor qualifications, which means that in the second and third quarters, more than 2 million workers will enter the U.S. labor market one after another, and as the labor gap improves, wage stickiness will decline further. Finally, in our report, "The Wind and the Waves – Global Economic Prospects 2024", we mentioned that the US Phillips curve is slipping from a steep range to a sunken zone. In the steep range, inflation will fall quickly as energy and durable goods inflation falls. However, in the depressed range, inflation will rebound in stages due to the stickiness of service inflation, and the containment of inflation has entered the most critical and difficult final stage. This means that the Fed needs to sacrifice higher employment in exchange for lower inflation. As a result, we expect the US economy to grow at a high and then a low for the year, and to raise the US GDP growth rate to 2.6% from 2.1% previously.
The Fed's rate cut depends on a further rise in the unemployment rate. The core PCE price index in the United States rose by 3.73% annualized in the first quarter, well above consensus expectations, indicating that inflationary pressures exceeded expectations, which required monetary policymakers to find a more nuanced and complex balance between promoting economic growth and controlling prices. In this environment, it is necessary to be more cautious in choosing the timing to start cutting interest rates. At present, the market has significantly increased the probability that the Fed will cut interest rates later in the year, and the probability of a "soft landing" (i.e., "recession-free") for the US economy is increasing. According to CME FedWatch Tool data, the expectation of a rate cut in June is only 15.1%, and the probability of a rate cut as early as September is only 45.7%. The Fed's future policy direction will be highly dependent on changes in the labor market. Although the U.S. job market remains strong, with non-farm payrolls showing growth for 39 consecutive months, with 303,000 new jobs added in March and the unemployment rate falling to 3.8%, the future direction of the unemployment rate will be a key factor in determining whether the Fed cuts interest rates. Based on available data and market trends, it is expected that supply and demand in the US labor market will reach a new equilibrium in the third and fourth quarters of 2024, and the unemployment rate will rise further. This change signals that the Fed may consider cutting interest rates to support the economy during the same time frame. Specifically, the baseline scenario is that the Fed will start cutting interest rates in the fourth quarter of 2024 (expected in November or December) with 1-2 rate cuts of 25-50 basis points. Considering that the U.S. economy is expected to grow by 2.6% in 2024, and that the wealth effect of fiscal expansion is likely to continue until the end of the second quarter of this year, coupled with the expected easing of monetary policy that may offset the withdrawal of fiscal stimulus, we think there is about an 80% chance of a "soft landing" for the U.S. economy. In other scenarios, there is a 10% chance that the US economy will enter a "mild recession", corresponding to a rate cut of 75-100 basis points, while if the US economy experiences a "hard recession", the rate cut may be more aggressive, corresponding to a rate cut of 100-200 basis points. In addition, the cumulative effect of high interest rates may exacerbate economic pressures after the end of a phased rebound in inflation. According to our study of the Delayed Cumulative Effect of Monetary Policy, the delayed cumulative effect of monetary policy could lead to a decline in real output, a tightening of bank credit, and an increase in debt-servicing pressure in the household sector. In such a situation, the inconsistency between fiscal and monetary policy could further weaken the Fed's interest rate cuts, leading to more frequent rate cuts in a "no-recession" or "mild recession" environment. Therefore, even in the case of a baseline scenario ("no recession") or a "mild recession", the market needs to pay close attention to these additional scenarios.