US economy appears to be losing some steam
Summary
The 0.5% contraction in real GDP that occurred in the first quarter of the year reflects, at least in part, the surge in imports as businesses pulled forward purchases ahead of tariff implementation. "Core" GDP, which grew at an annualized rate of nearly 2% in Q1, shows the modest decline in overall GDP overstates the weakness of the economy at the beginning of the year.
Conversely, our projection of 1.8% real GDP growth in Q2 may overstate the strength of the economy at present. We estimate that real consumer spending rose only 1.3% in Q2, while business fixed investment and residential investment both weakened during the quarter.
Labor market indicators also suggest the economy has decelerated a bit. Private sector payrolls rose at an average monthly pace of 107K in the first six months of the year, down from the average monthly rate of 130K over the course of 2024.
Despite the softer pace of underlying economic activity, we think the FOMC will decide to keep its target range for the federal funds rate unchanged at its next meeting at the end of July. With core PCE inflation still running above the FOMC's target of 2%, we do not think a critical mass of Fed policymakers are on board yet to approve a rate cut at the conclusion of the Committee's policy meeting on July 30.
If, as we forecast, any rise in inflation in the coming months proves to be a bump rather than a spike and the labor market softens further, then we believe the FOMC will cut rates by 25 bps at its meeting on September 17. We then look for the FOMC to follow up its September rate cut with two more similar reductions on October 29 and December 10.
We readily acknowledge that the risks to our outlook are skewed toward the Fed waiting longer to ease policy than we currently forecast. We do not have a strong conviction about the timing of rate cuts, but we think the fed funds target range will be roughly 75 bps lower this time next year than it is currently.
Author
Wells Fargo Research Team
Wells Fargo
