Why is the US economy poised for a strong second half of the
year, despite slowing GDP growth? Our Chief US Economist points
to population growth, housing demand and anticipated Fed rate
cuts.
----- Transcript -----
Ellen Zentner: Welcome to Thoughts on the
Market. I'm Ellen Zentner, Morgan Stanley's Chief US Economist.
Along with my colleagues bringing you a variety of perspectives,
today I'll discuss our mid-year outlook for the US economy.
As we near the midpoint of this year, we refresh our outlook for
the second half of the year. In our base case, the US economy
remains strong, but US GDP growth is slowing, and slowing from
3.1 percent on a fourth quarter over fourth quarter basis last
year, to 2.1 percent this year and in 2025.
Okay, so what's behind the continued strength? Well, it's
something we've been intensely following this year. Faster
immigration and population growth will continue to expand the
labor supply and support economic activity, and all without
increasing inflationary pressures. So, whereas the mid-pandemic
labor market was characterized by persistent shortage of labor,
the supply of labor is now increasing, and we think will outstrip
demand this year.
This will drive the unemployment rate higher, which we expect
will end this year half a point above 2023 at 4.2 per cent and
rise further to 4.5 per cent in 2025. And wage gains should
moderate further as the unemployment rate rises. We think
consumer activity will continue to slow this year and into 2025
as that cooling labor market weighs on growth in real disposable
income and elevated interest rates keep borrowing costs high.
Tight lending standards also limit credit availability. That
said, we do think lower rates are on the horizon, and this should
spur a pickup in housing demand and goods spending around the
middle of next year. In fact, after substantial reflation numbers
in the first quarter of 2024, we expect lower inflation numbers
ahead. We've already seen that in the April data, as rents,
goods, and services prices decelerate.
The Fed has held the policy rate steady at a range of 5.25 to 5.5
per cent since July 2023, and we expect it will deliver the first
quarter point cut in September this year. In total, we expect
three quarter point cuts this year, and four more by the middle
of next year, which lowers the policy rate to around 4.5 per cent
in the fourth quarter this year to about 3.5 per cent in the
fourth quarter of 2025. But even before rate cuts, the Fed has
announced it will start phasing out Quantitative Tightening, or
QT, in June. We expect QT to end around March 2025, when the
Fed's balance sheet is a little above 3 trillion.
Finally, let's talk about housing. We expect continued growth in
residential investment through 2025, with a rapid rise in housing
starts, solid new home sales, and a bit more turnover in existing
home sales as mortgage rates fall. Home building and increased
brokerage commissions should keep residential investment on the
boil, posting a 4.6 per cent rise on a 4th quarter over 4th
quarter basis this year and 3.2 per cent in 2025. Our residential
investment forecasts are a good deal stronger than we expected in
the year ahead outlook we published last November. Booming first
quarter growth probably reflected a combination of the warm
winter and the temporary downswing in mortgage rates. We don't
expect the same outperformance later in the year. But at the same
time, housing demand is greater than we had anticipated amid that
faster population growth.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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