Research Briefing | Sep 19, 2023

Why a US year-end slowdown is still our base case

We still think that the US economy is headed for a slowdown at the turn of the year. Three factors will increasingly weigh on growth: the impact of past rate rises; the drag from fiscal policy; and less resilient household finances.

What you will learn:

  • But we forecast only a mild contraction in output, so the downturn may not be broad or synchronized enough to meet the National Bureau of Economic Research’s “widespread and persistent” criteria to classify it as a recession. That will be little comfort, though, for sectors such as real estate and manufacturing that are set to feel the brunt of the economic hardship.
  • While we are sure about the three forces buffeting growth, the timing of their impacts is much less clear. It’s very possible that they may not hit concurrently, which would avoid a contraction in activity but result in more persistent subpar growth.
  • Alongside our pessimism on the growth outlook, we think inflation is likely to prove stickier than the market is anticipating. So, although our forecast for cuts to the Fed Funds Rate is broadly in line with market pricing, we think the risk of a more cautious Fed is skewed to the upside.
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