The presidential elections are coming up in the United States this year. This is reason enough to take a closer look at the US economy. The US economy proved remarkably resilient last year. It probably grew by just under two and a half percent. That is significantly more than many European economies, which grew only slightly or – like the German economy – even shrank a little. The US economy can also be expected to be a growth engine in the medium term. A look back shows that it often digests crises more quickly than many European economies. For example, the US economy has overcome both the financial crisis and the economic consequences of the pandemic more rapidly than the eurozone. As a result, gross domestic product in the US has grown by more than thirty percent since the outbreak of the financial crisis (see figure). By contrast, economic output in the eurozone has only increased by around twelve percent in fifteen years. It should be mentioned, however, that a look at gross domestic product per capita or hours worked, for example, would tend to show the eurozone in a somewhat better light. However, a clear gap exists between the USA and the eurozone.
Even the unpredictable and confrontational presidency of Donald Trump does not seem to have damaged the US economy. However, the political risks are high this year. A re-election of Donald Trump would make US economic and foreign policy much more unpredictable. A re-election of Donald Trump does not necessarily have to end in disaster, as some fear. However, it would undoubtedly be associated with significant uncertainties and increased risks for democracy. In the following analysis, my baseline scenario assumes that there will be no dramatic changes in American politics after the presidential elections in November.
There will probably be solid growth in the final quarter of 2023
Growth of the US economy has probably weakened somewhat recently but is still likely to have been solidly positive. The official gross domestic product figures for the fourth quarter of 2023 have yet to be available. Nowcasts – so estimates of current economic developments – are published by the Federal Reserve Bank of Atlanta, for example, and indicate growth of around 0.5% for the fourth quarter just ended. Previously, economic output in the third quarter of 2023 had grown by a solid 1.2% compared to the previous quarter (annualized 4.9%). This strong growth was primarily supported by private consumption, which expanded by 0.8%. Corporate investment, which had risen exceptionally in the first half of 2023 due to massive government subsidies for semiconductor factories and renewable energy production, only increased slightly at a high level in the third quarter. The downturn in residential construction investment that began in 2021 appears to be ending; at least, that is what the growth of 1.6% suggests. Both exports and imports increased significantly at similar rates in the third quarter.
The development in the second half of 2023 indicates that a recession can be avoided in the United States. However, we should not rejoice too soon. Recessions often come as a surprise to many. The US economy will likely face at least a period of lower growth rates. Private consumption, in particular, is likely to grow less dynamically than last year. Although the savings accumulated during the pandemic have yet to be used up, depending on how they are calculated, they are gradually running out.
Private consumption as a pillar of the economy
Retail sales were still solid in December 2023, however, and consumer sentiment has recently improved somewhat. However, sentiment indicators have been challenging to interpret for some years and are pessimistic overall. At present, these indicators appear to be less suitable for assessing the propensity to consume. Among companies, sentiment in the service sector is better than in the industry. Given the weakening global economy and the deterioration in financing conditions, industry will not provide any positive impetus for the US economy for the time being. More robust growth is only expected here towards the end of 2024 and in 2025, with slightly higher growth in the global economy.
Gradual cooling on the labor market
Although the labor market situation is still good, it has gradually cooled down somewhat. The unemployment rate in December was still at a low 3.7%. However, the labor force participation rate has recently fallen again. The reasons for this still need to be clarified. One possible explanation is that fewer people are actively trying to find a job due to the cooling labor market. The number of newly created jobs is also trending downwards, indicating a gradual weakening of the labor market. A significant rise in the unemployment rate cannot be ruled out but is not expected at present. However, private consumption is undoubtedly being dampened somewhat by the somewhat weaker labor market.
Corporate investment will remain more or less constant at a high level, also due to the government support programs. The only moderate growth in private consumption and the sluggish global economy will leave their mark on corporate investment in the beginning of 2024. It can be assumed that political uncertainty will increase before the presidential elections, which is likely to further dampen investment. Towards the end of 2024, falling interest rates should then improve financing conditions and stimulate companies‘ willingness to invest. I see a slow recovery in residential construction investment. Demand is still structurally high, and the fear of interest rates rising further has at least faded for now.
Fiscal policy is unlikely to provide any new stimulus for the US economy for the time being. According to the Congressional Budget Office’s forecasts, the federal budget deficit is already high and is likely to remain so. Noticeable positive economic effects are still expected from the Inflation Reduction Act passed in the summer of 2022 and other support programs for expanding semiconductor production and infrastructure. Uncertainties arise from the ongoing political disputes surrounding the adoption of a budget law. However, I assume that the political parties are interested in reaching an agreement, especially in an election year.
Question marks over monetary policy
Monetary policy has rapidly become more restrictive since spring 2022, probably contributing to lower inflation rates. In December, inflation – measured as an increase in the consumer price index calculated by the Bureau of Labor Statistics – was still at 3.4% (compared to the same month last year). An alternative inflation index, which is calculated by the Bureau of Economic Analysis and to which the US Federal Reserve attaches great importance, most recently stood at 2.6 percent. Nevertheless, the battle against inflation has yet to be won and the problems with the Suez and Panama Canal in particular could lead to persistently higher freight rates again and have a slight upward effect on prices. However, there are currently no signs of severe problems in supply chains, such as in 2021 and 2022. However, I assume that the US Federal Reserve will cut interest rates three times this year.
Overall, the US economy is likely to grow by around one and a half percent this year. A rather weak start to the year will dampen the annual rate. After that, the development of the US economy should become more dynamic. From 2025, growth rates of around two percent are plausible. Inflation could settle at an annual average in 2024 that is only slightly above the central bank’s average two percent target. However, the risks of higher inflation rates remain elevated.
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