US economic outlook: Growth sturdy as downside risks fade

Growth sturdy as downside risks fade

Economic growth in the United States continues to run at a sturdy pace. After expanding solidly during the first half of the year, real GDP is shaping up to rise at a 3.2% quarterly annualized pace in Q3. Some near-term moderation appears in store as the lagged effects of tight monetary policy further feed through to households and businesses, but growth should remain resilient and eventually be energized by less restrictive monetary policy.

A less vulnerable financial position for households illustrated by recent upward revisions to the saving rate help better explain the remarkable staying power of the consumer recently. We currently anticipate real personal consumption expenditures to expand a strong 3.2% in Q3. A moderation should still soon begin to set in; however, household finances standing on more secure footing and a firmer labor market outlook have led us to boost our near-term forecast for consumer spending.

September's strong employment report helps assuage concerns that a sharp deterioration in the labor market is imminent and suggests that conditions may hold up a bit better further down the line than our previous forecast had assumed. We expect payroll growth to average 128K per month in Q4 compared to 105K in our prior forecast. The upward trend in the unemployment rate since the start of the year is likely to resume, but peak in Q4 at a lower rate.

We have not made any material changes to our inflation projections. Although the ride back to the FOMC's 2% target will continue to be bumpy, the conditions for additional progress remain largely in place. The headline PCE deflator should reach the Fed's 2% target in the near future. However, core inflation is likely to remain slightly above 2% until the second half of 2026.

The process of reducing the federal funds target range kicked off at the September FOMC meeting with the delivery of a 50 basis point cut. We maintain our view that the FOMC will deal two more rate cuts this year, with 25 basis point reductions at both the November and December meetings. Beyond then, an additional 125 basis points of easing will be necessary to push the fed funds target rate closer to neutral territory. However, a less urgent descent now seems likely, and we believe reductions will be spread across next year as a whole.

Download The Full Economic Indicator Monthly