The U.S. economy will likely dodge a recession, but Federal Reserve Chairman Jerome Powell won’t get his economic soft-landing — steady growth with inflation at 2%.
Here’s why. Since U.S. President Joe Biden took office, consumer prices are up 19% and real wages are down. Households have kept up spending by tapping savings accumulated from COVID-19 pandemic support checks. Yet as those funds have run out, consumers have turned to borrowing and cutting expenses — they have purchased more store brands while spending less on restaurant meals and other discretionary items.
First quarter U.S. GDP slowed to 1.4%, but this exaggerates the slowdown in demand. Businesses ran down inventories, and a strong U.S. dollar plus Chinese subsidizes increased U.S. imports. Both are subtractions from total purchases in calculating GDP.
The Biden administration’s tariffs on Chinese EVs, batteries, solar panels, steel and aluminum mostly targeted goods that the U.S. isn’t yet importing from China. Meanwhile, China has so much excess capacity that it will export at a loss and where other foreign sources could substitute. Without another surge upward by the dollar, continued sharp jumps in imports are unlikely.
Business investment in the U.S. remains robust thanks in no small part to the artificial intelligence boom. Plus, Biden’s infrastructure and industrial policy investments are picking up. Biden also has added stimulus with more student loan forgiveness, while aid to Ukraine, Israel and Taiwan will feed back into the U.S. defense industry.
Immigration also is contributing to economic growth. Additions to the labor force from both indigenous population growth and legal immigration should have permitted employment growth of about 100,000 a month. Instead, it was about 250,000. Adding to U.S. domestic demand, supply and growth: unlawful immigrants who are managing to find work.
Shortages abound in key areas where businesses need workers. Competition is intense for new hires to build out artificial intelligence. Over the past year, wages are up 9.2% in new home construction, 7.6% at automobile repair shops and 7.3% at dry cleaners and laundries.
Along with rising labor costs and shortages of buildable land near major cities, Biden’s new energy regulations add $31,000 to the cost of building a new home. Home prices, as tracked by the S&P CoreLogic Case-Shiller Index, even with high mortgage rates, are rising at 7.2% a year.
Biden says he wants to resurrect Trump-era controls at the southern border. A continued but moderated migrant influx would limit wage pressures in construction and many service jobs.
Growth (with an asterisk)
It is going to be a bumpy landing. The economic forecasting services I monitor most closely are Wells Fargo and Action Economics. Their outlooks for the U.S. are consistent with my own thinking that the U.S. economy is returning to a growth path of about 2% but inflation running higher than 2% will continue.
Year-over-year headline inflation in June was 3%, and prices — less food and energy — rose 3.3%, down from peaks of 9.1% and 6.6%, respectively, in 2022. Most of the decline was in goods, not services. Overall, a strong dollar and moderating import prices helped put a lid on goods prices. Year-over-year, imported goods prices, excluding fuels and food, rose just 0.1%, and consumer prices for goods, excluding energy and food, were down 1.8%.
When the Fed finally does lower interest rates, U.S. dollar-denominated debt won’t be as attractive to foreign investors, nor will U.S. stocks and real estate. This will weaken the dollar and raise import prices. At the same time, domestic manufacturers, facing wages rising in the goods sector at 5.2% annually, won’t be able to keep cutting prices. Instead they will limit supply and prices will rise.
Market commentators have been focused on the limited scope of recent stock market gains, but the outlook for economic growth is good news. FactSet estimates that S&P 500 profits will expand by 11.2% in 2024 and 15.3% for the first half of 2025.That should create the foundation for a broader stock-market rally.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.