US: Significant slowing in growth momentum expected next year - ABN AMRO

Bill Diviney Senior Economist at ABN AMRO, points out that current US growth rates are not sustainable. They see that cooling investment, fading fiscal stimulus, and Federal Reserve tightening are likely to drive a slowdown, but not a recession.

Key Quotes: 

“We expect a significant slowing in growth momentum over the coming year, but a recession looks unlikely”.

“Pivate consumption should remain solid, underpinned by accelerating income growth and sound household balancesheets. Consumption is the backbone of the US economy, and will once again take the reins as the primary growth driver over the next two years.”

“While the Fed has been tightening monetary policy, rate hikes have been far more gradual in this cycle (once per quarter rather than twice per quarter in 2004-06), and with inflation still benign, the Fed has signaled its intent to prolong the expansion as much as possible. While the risks of a recession naturally increase as the economy approaches full capacity (...) such risks currently look well contained.”

“We expect inflationary pressures to remain benign. While wage growth is accelerating, productivity growth has also picked up somewhat, which has contained the rise in unit labour cost growth. Even if productivity growth falters, the low labour share of income leaves ample room for businesses to absorb the hit to margins without passing on higher costs to consumers. At the same time, tighter monetary policy will increasingly dampen demand-side pressures, reducing the pricing power of businesses. As such, we continue to expect core services inflation to pickup somewhat, but not to the degree that it leads to a material rise in inflation expectations that causes alarm at the Fed.”