Just before the US presidential elections, the US economy is in a remarkably good state. Despite the rapid interest rate hikes by the Federal Reserve to combat inflation, a recession did not occur.
The US economy expanded surprisingly strongly in the second quarter of 2024, growing by 0.7 percent compared to the previous quarter. After moderate growth in the first quarter, the economy regained momentum. The increase at the beginning of summer continued to be supported by private consumption, which rose by 0.7 percent. Business investments also increased significantly by 1.0 percent. The recovery in residential construction investments that began in the second half of the year did not continue in the second quarter. Given the still weak global economy, foreign trade provided no stimulus for the US economy: exports increased only weakly and significantly less than imports.
In the past third quarter of 2024, for which we will receive initial GDP estimates next week, the US economy continued to grow. The growth rate published next week will likely show a slight decrease. However, private consumption should still support the economy. Retail sales developed robustly over the summer. The labor market situation is remarkably robust but has nevertheless deteriorated slightly. The trend shows fewer new jobs being created, and the unemployment rate has slowly increased from 3.5 percent to 4.1 percent in September over the past quarters.
The US economy is expected to continue growing solidly in the winter half-year, albeit without much momentum. Private consumption will provide less of a boost to the economy due to a slightly less favorable labor market situation and lower wage increases. Business investments were primarily stimulated last year by government support programs for renewable energies and semiconductor production and are now likely to increase only slightly. However, gradually declining interest rates, especially in the coming year, should improve financing conditions and stimulate companies‘ willingness to invest again. Residential construction investments will also gradually increase again and provide a noticeable boost to the US economy, especially in 2025 and 2026.
No new impulses for the US economy are expected from fiscal policy before the presidential and parliamentary elections in November. These elections are associated with high uncertainties about the future economic policy of the United States. If Donald Trump is re-elected as president, an unpredictable and confrontational policy style could be expected, and a further tightening of trade policy is conceivable.
Monetary policy has become rapidly more restrictive since spring 2022, which likely contributed significantly to a gradual decline in high inflation rates last year. Since the beginning of the year, inflation rates initially remained well above the Federal Reserve’s two percent target, but in the summer, inflation rates gradually decreased. Compared to the previous year, inflation was still at 2.4 percent in September. Core inflation, which excludes energy and food prices, increased by 3.3 percent compared to September 2023. Inflation in services recently remained at a high level. Against this background, the central bank cut its key interest rates for the first time in September, even by 50 basis points. Further interest rate cuts are likely to follow. One may expect two more small interest rate cuts of 25 basis points each by the end of the year.
Overall, one may expect the US economy to grow by 2.8 percent in the current year. For instance, this is the forecast by the International Monetary Fund published in October. Further expansion of the US economy is also expected in 2025. However, the growth rate is likely to be somewhat lower between 1.6 and 2.2 percent. Inflation will probably fall to about two percent in 2025. For unemployment, only a small increase in the coming winter half-year may be expected.
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