Gauging the Impact of Rate Changes, Growth, and Foreign Fluctuations on the US Economy

Where could the US economy go in the next 12 to 18 months and what are the potential implications for the broader financial markets? During our recent thought leadership webinar, Brian Scheid, Senior Reporter for Global Markets at S&P Global Market Intelligence, asked S&P Global Ratings’ Chief U.S. Economist Satyam Panday about the economic outlook for the U.S, focusing on the possibility of a recession, the impact of the Federal Reserve's actions, and the influence of China's economy. Read our blog post below for a recap of Panday’s observations.

Where Do We Land?

The likelihood of a soft landing for the U.S. economy has increased, and the potential for a recession starting within the next 12 months seems to be moderating. Panday attributed this to the resilience of the economy over the last three quarters, especially in terms of personal consumption expenditures, business investments and fiscal policies put in place last year. “When we think of [a] soft landing, we are thinking more about inflation coming back towards 2% without the economy having to shed a lot of jobs,” Panday stated.

“We have seen headline inflation move down,” said Panday, but the increase in energy prices has been a noticeable hiccup. “Core inflation, which has been a bit stickier, has also started to move down, and we think some of the lagged effects from housing [and] car lease prices are going to play out in the next couple of quarters. We think that [core inflation] will most likely get closer to the 2% range by the end of next year."

Panday also suggested that GDP growth will slow down below underlying structurally driven potential growth in the next 12 to 18 months. The labor market will respond to this slow-down with job losses, with the unemployment rate likely rising to about 4.5%-4.6% by early 2025.

Interest Rates

The U.S. Federal Reserve is likely done with rate hikes for the time being, but this could change if economic data continues to surprise on the upside. Fed members have noted that they should remain “data dependent” on their decision, maintaining optionality to raise rates another 25 basis points. Panday noted that November might be the point at which the Fed decides to raise rates if current upside surprises to growth persist. However, it’s possible that “data on inflation and the labor market [comes in] on the weaker side” of the spectrum by November, which could cause the central to re-think an increase. "It seems, at least for now, the Fed might just be able to bring that inflation rate back close to [a] 2% target [by late next year] without bearing a huge cost on unemployment."

Impacts from Abroad

The direct impact from a seemingly slower growth in China on the U.S. economy is expected to be small. While acknowledging China's significant role in the global economy, Panday shared that the U.S. economy is predominantly domestically driven, limiting its exposure to Chinese economic fluctuations. “You don't see a lot of exposure for the U.S. exporters because the share of U.S. exports going to China is quite small,” said Panday. Pinpointing the source of China’s gradually slowing economy is key. If the infrastructure and property sectors are driving the weaker growth, “that should impact commodity prices” and may create “a disinflationary impulse” through the US’ producer prices channel that could “help some of what the Fed is trying to do.”

To hear further insights from Satyam on the U.S. economic outlook, access our complimentary, on-demand webinar.