As good as it gets

In a nutshell

• The US economy is growing well above its potential, with further acceleration unlikely.
• Consumer spending, in particular, should be held back as job growth slows down and price pressures rise.
• Leading indicators are, however, not pointing to a downturn anytime soon – particularly since the Fed has no reason to accelerate its policy tightening.

The US economy continues to grow at a strong pace, but we do not believe that it can accelerate sustainably, despite the fiscal boost. In other words, the current US picture appears to be as good as it can get, with the expanding budget deficit and emerging signs of capacity constraints signalling that cyclical risks are beginning to build.

This is not to say that we anticipate a significant slowdown before real interest rates have moved up further and started to stress-test the current trends. But 5% nominal GDP growth (2.8% real growth) does seem somewhat excessive relative to the potential growth anchoring.

Typically, consumer spending should find itself constrained by slower job growth as full employment is reached, as well as by higher inflation biting into household income – not to mention the impact of rising gas prices.

Consumption could potentially be sustained by a fall in savings but, given the already low 3.2% savings rate, it is difficult to push this argument too far. Rather, we think that sub-3% real consumption growth is a reasonable assumption for the full year (see chart IV).

Meanwhile, though, investment spending has been picking up from low levels, thanks in part to the corporate tax cuts. And leading indicators that have served historically to anticipate downturns still suggest that recession is a distant prospect for the US (see chart V).

On the monetary policy front, we expect the Federal Reserve (Fed) to maintain its current pace of hiking interest rates once a quarter while continuing to gradually reduce the size of its balance sheet, at least until the end of this year. Inflation and wages are trending higher but only at a gradual pace, which is unlikely to force the Fed to reconsider its strategy.