Globaltraded.com , Washington — The unrelenting grip of inflation on the U.S. economy since early 2021 seems to be relenting, albeit sluggishly. Despite the decline in October, the 12-month percent change in the all-items Consumer Price Index (CPI) remains stubbornly above the Federal Reserve’s 2% target at 3.2%. The core CPI, excluding food and energy prices, paints a less optimistic picture, standing at 4%, consistently elevated since June 2021 and showing resistance to significant decline.
The reasons behind the sluggish decline in inflation are manifold. A more restrictive monetary policy, often a harbinger of slowed growth in money supply and credit, as well as increased interest rates, is yet to manifest its full impact. The core CPI’s persistence above 4% suggests a lingering concern for policymakers, signaling a slower-than-expected descent from the peak of 6.6% in September 2022.
Key Themes in the U.S. Economic Outlook
Amidst recent economic vigor with a 4.9% annual increase in real GDP in the third quarter, the specter of pessimism looms over the future economic landscape of the United States. Projections for 2023 and 2024, sourced from the Federal Reserve Bank of Philadelphia’s November Survey of Professional Forecasters, reveal a nuanced narrative.
While a 2.6% growth in real GDP is anticipated for 2023, significantly higher than the previous year, concerns arise as forecasts indicate a subsequent slowdown to 1.3% in 2024. Key components of real GDP, including personal consumption expenditures and nonresidential fixed investments, are expected to decelerate. Government expenditures, pivotal in economic stability, are anticipated to slow, amplifying worries about the impact of rising federal debt on future government spending.
Persisting Pessimism: Risks to the Economic Outlook
Despite the economy avoiding an immediate recession, the risk of negative real GDP growth looms large. Private forecasters, as indicated in the November Survey of Professional Forecasters, assign roughly a 40% probability of negative growth in the first half of 2024 and a 36% probability in the second half. These probabilities, above historical averages, underscore the persistent concerns among economists and analysts.
Several factors contribute to this enduring pessimism. The effectiveness of the current monetary policy remains uncertain, with potential increases in the policy rate posing a risk to further slowing real GDP growth in 2024. Geopolitical uncertainties, including conflicts in oil-producing regions, could lead to an unforeseen rise in crude oil prices, impacting inflation.
The specter of rising interest rates in 2023 raises concerns about default and delinquency rates across various loan categories, potentially affecting financial stability. The possibility of increasing defaults in the commercial real estate sector remains a notable concern, signaling potential headwinds for the broader economy.
Looking Forward: A Cautious Approach
As the U.S. unemployment rate, currently below 4% in the fourth quarter of 2023, defies expectations amidst the Fed’s rate increases, inflation pressures are gradually easing. Yet, senior Fed officials emphasize the need for continued vigilance. Heading into 2024, economic conditions are expected to deteriorate modestly, with positive real GDP growth, job gains, and a projected decline in inflation to around 2.5%.
Despite these cautiously positive indicators, the prevailing pessimism surrounding inflation and unemployment underscores the delicate balance the U.S. economy continues to navigate. The road ahead remains uncertain, requiring a nuanced and cautious approach to mitigate potential risks. (GT)
