Fed rate cut in September? The data will decide

US macroeconomic outlook: Navigating inflation, interest rates, and growth

This report provides a comprehensive analysis of the current macroeconomic landscape of the United States, examining key factors influencing its fiscal and monetary policies, economic indicators, and overall outlook. The report is structured to provide insights into the near term (five-day outlook), short term (five-week outlook), mid-term (five-month outlook), and long term (five-year outlook). This structure allows for a nuanced understanding of the potential trajectory of the US economy and its implications for Forex traders.

The US economy, the largest in the world, is currently navigating a period of slowing growth, persistent inflation, and a tight labour market. The Federal Reserve's aggressive monetary policy tightening over the past year has started to show results in moderating inflation, but concerns remain about the potential for a "hard landing" as the economy slows. Geopolitical tensions, particularly the conflict in the Middle East and strategic competition with China, are also influencing the US economic landscape.

Navigating a tricky fiscal landscape

The US fiscal policy is currently characterised by a large and growing budget deficit, fueled by increased spending on social programs, defence, and infrastructure. This expansionary fiscal policy has contributed to economic growth in recent years, but it has also raised concerns about long-term debt sustainability.

The most recent significant fiscal policy change was the passage of the Fiscal Responsibility Act of 2023, which aimed to reduce the deficit by roughly $1 trillion over the next decade. However, the Act also included provisions for increased spending on infrastructure and other priorities. The impact of these competing forces on the nation's macroeconomics is still unfolding. Over the past five years, the most significant fiscal policy change was the Tax Cuts and Jobs Act of 2017, which significantly reduced corporate tax rates. While this initially boosted economic growth, it also contributed to the growing budget deficit.

Key economic indicators

Key economic indicators in the US present a mixed picture, with some pointing to slowing growth while others suggest continued resilience. Inflation has moderated from its peak, but remains above the Federal Reserve's 2% target, while the labour market remains tight despite recent signs of cooling.

Recent data releases have shown a mixed bag. The July CPI report indicated a slowdown in headline inflation to 2.9%, the lowest since March 2021, but core inflation remained elevated at 3.2%. The labour market showed signs of weakening, with the unemployment rate rising to 4.3% in July. However, other indicators, such as retail sales and industrial production, have shown resilience.

Over the past six months, the most significant change in key economic indicators has been the decline in inflation from its peak of over 9% in mid-2022. This decline has been driven by a combination of factors, including easing supply chain disruptions, lower energy prices, and the Federal Reserve's monetary policy tightening.

In the short term, key economic indicators are expected to continue to reflect slowing growth. The August CPI report, due next month, will be closely watched for further signs of disinflation. In the mid-term, the trajectory of the economy will depend heavily on the path of inflation and the Federal Reserve's monetary policy response.

Monetary policy at a crossroads

The Federal Reserve's monetary policy is currently in a restrictive stance, with the federal funds rate at a 23-year high of 5.25%-5.50%. The Fed has maintained this rate for eight consecutive meetings, signalling its commitment to bringing inflation down to its 2% target.

The most recent monetary policy change was the decision to hold rates steady at the July FOMC meeting. However, the Fed signalled that a rate cut could be on the table in September if inflation continues to moderate. This shift in tone reflects the Fed's growing confidence that inflation is on a downward trajectory.

Over the past six months, the most significant monetary policy change was the shift from aggressive rate hikes to a more data-dependent approach. This shift reflects the Fed's recognition that the impact of its past policy tightening is still working its way through the economy.

In the short term, the Fed is expected to remain data-dependent, with the September FOMC meeting likely to be a pivotal moment. If inflation continues to moderate and the labour market shows further signs of cooling, a rate cut is likely. However, if inflation remains stubbornly high or the economy shows signs of overheating, the Fed could maintain its restrictive stance. In the mid-term, the path of monetary policy will depend heavily on the trajectory of inflation and the overall health of the economy.

Macroeconomic outlook: Uncertainty reigns

The US macroeconomic outlook is characterised by uncertainty, with the potential for both a "soft landing" and a "hard landing" as the economy slows. The path of inflation, the Federal Reserve's monetary policy response, and geopolitical developments will be key factors shaping the outlook.

In the short term, the economy is expected to continue expanding, albeit at a slower pace. The recent moderation in inflation and the Fed's shift to a more data-dependent approach suggest that a "soft landing" is still possible. However, the risks to the outlook are tilted to the downside, with the potential for a resurgence in inflation or a sharper-than-expected slowdown in growth.

In the mid-term, the outlook is more uncertain. Trading Economics forecasts the US economy to grow by 2.8% in Q3 2024 and 1.8% in 2025. However, these forecasts are subject to significant uncertainty, and the actual outcome could be considerably different.

Economic indicators: A guide for traders

Economic growth

US GDP Growth Rate: Expanded 2.8% in Q2 2024, up from 1.4% in Q1. Short-term: Expected to slow further. Mid-term: Projected to trend around 1.8% in 2025.

US Composite PMI: Revised lower to 54.3 in July, signalling a solid expansion in private sector activity. Short-term: Expected to remain above 50, indicating continued expansion. Mid-term: Could moderate further as the economy slows.

Price changes (inflation)

US Inflation Rate: Slowed to 2.9% in July, the lowest since March 2021. Short-term: Expected to remain around current levels. Mid-term: Projected to trend around 2.4% in 2025.

US Core Inflation Rate: Eased to 3.2% in July, a three-year low. Short-term: Expected to moderate further. Mid-term: Projected to trend around 2.6% in 2025.

US Producer Price Inflation MoM: Increased 0.1% in July, below expectations. Short-term: Expected to remain subdued. Mid-term: Projected to trend around 0.3% in 2025.

US Producer Prices Final Demand Less Foods and Energy MoM: Increased 0.3% in June 2024. Short-term: Expected to remain subdued. Mid-term: Could fluctuate depending on global input costs and supply chain dynamics.

Labour

US Non Farm Payrolls: Increased by 114K in July. Short-term: Expected to moderate further. Mid-term: Projected to trend around 170K in 2025.

US Unemployment Rate: Rose to 4.3% in July. Short-term: Could tick up further. Mid-term: Expected to stabilise around 4%.

US Average Hourly Earnings: Increased 0.2% in July. Short-term: Expected to moderate. Mid-term: Growth could slow further as the labour market cools.

Housing

US Building Permits: Rose 3.9% in June. Short-term: Could moderate as higher interest rates weigh on demand. Mid-term: Growth likely to slow further as the housing market cools.

US Housing Starts: Increased 3% in June. Short-term: Could moderate as higher interest rates weigh on demand. Mid-term: Growth likely to slow further as the housing market cools.

US Existing Home Sales: Fell 5.4% in June. Short-term: Could decline further as affordability challenges persist. Mid-term: Sales likely to remain subdued as the housing market cools.

Business confidence

US ISM Manufacturing PMI: Fell to 46.6 in July, indicating a contraction in factory activity. Short-term: Expected to remain below 50, signalling continued contraction. Mid-term: Could improve if the Fed starts cutting rates.

US Philadelphia Fed Manufacturing Index: Soared to 13.9 in July, indicating expansion in the region. Short-term: Could moderate from its recent high. Mid-term: Likely to be volatile as the economy slows.

Consumer sentiment

US Michigan Consumer Sentiment: Revised higher to 66.4 in July, but remained at an eight-month low. Short-term: Could remain subdued amid economic uncertainty. Mid-term: Could improve if inflation continues to moderate and the Fed starts cutting rates.

Trade

US Balance of Trade: Narrowed to $73.1 billion in June. Short-term: Could fluctuate depending on global demand and supply chain dynamics. Mid-term: The deficit is expected to persist.

US Exports: Rose 1.5% in June. Short-term: Could moderate as global growth slows. Mid-term: Growth likely to be subdued.

US Imports: Rose 0.6% in June. Short-term: Could moderate as domestic demand slows. Mid-term: Growth likely to be subdued.

Conclusion: A delicate path forward

The US economy is at a crossroads, with recent data pointing to slowing growth and moderating inflation. The Federal Reserve faces a delicate balancing act, seeking to bring inflation down to its 2% target without triggering a recession. The path of monetary policy in the coming months will be crucial for determining the trajectory of the economy.

Sources

• US Bureau of Labor Statistics.

• US Bureau of Economic Analysis.

• Federal Reserve.

• Trading Economics.

• National Association of Home Builders.

• S&P Global.

• Institute for Supply Management.

• Federal Reserve Bank of New York.

• Federal Reserve Bank of Philadelphia.

• Federal Reserve Bank of Dallas.

• University of Michigan.

• Technometrica Market Intelligence/RealClearMarkets.

• U.S. Department of the Treasury.

• U.S. Census Bureau.