Despite falling into a technical recession during H1, the recent easing in gasoline prices will support positive real private consumption growth during H2.
Headline inflation has peaked, but labour market and underlying price pressures remain strong. Fed will be forced to hike US economy into a recession in 2023.
We adjust the GDP forecasts to +1.6% in 2022 (from +2.4%) and -0.2% for 2023 (from +0.1%). The downward revision for 2022 largely reflects the weaker-thanexpected growth during H1, but risks remain tilted to the downside for 2023.
Despite the recession fears, US economy performed relatively well over the summer, as the GDP contraction in Q2 was driven by slower inventory growth. Aggregate demand, fuelled by the pandemic-era stimulus, recovered near its pre-covid trend already in late 2021, and despite the sharp decline in consumers’ real incomes, the July retail sales continued to signal broad-based growth in nominal spending. As we highlighted in Research US – Higher for longer, 19 August, the persistent drop in the US labour force combined with demand near pre-pandemic trend signals, that output gap has turned positive.
While we see European inflation accelerating further towards the fall, US headline inflation has likely already peaked in June. Gasoline prices are down 23% from the peak, and we now expect energy contribution to turn negative in 6 months’ time, which implies further declines in headline inflation. In addition, food-related futures prices have fallen from the recent peaks and PMI indices point towards continuing easing in supply chain challenges. That said, the positive output gap combined with the tight labour markets will continue to fuel the underlying price pressures until Fed brings the aggregate demand back into equilibrium by tightening financial conditions further.
Labour market shows few signs of cooling
The economic imbalance challenging the Fed is the most evident in the labour markets, as even though labour demand appears to have peaked, the ratio of job openings to unemployed remains at historically high levels. Unit labour cost growth outpaced the high consumer price inflation during H1, suggesting that businesses are pressured to continue hiking prices also in the future. Given the 2% inflation target and productivity growth averaging just above 1% during 2010s, wage growth around 3% would be consistent with Fed’s goals, while in July the realized pace was 5.8% m/m AR.