United States Economic Forecast

Scenarios

Baseline (70%): Real GDP growth slowed overall in the first quarter of 2024, coming in very close to our previous forecast’s expectations.² We expect GDP growth will continue to moderate through the second half of this year and the start of the next, but the story is still positive overall. Consumer spending is forecasted to rise 2.3% this year, up from the 2.2% increase in 2023. Business investment is expected to increase 3% in 2024, down from 4.5% last year. Government spending is forecasted to rise 2.5%. Given that the US economy is expected to outperform many other global economies in the short term, we forecast imports to increase 3.1% on average in 2024, while exports are predicted to rise at a slower pace of 2.4%.

Consumer price index (CPI) inflation stays above the 3% threshold for the second quarter of this year before falling to 2.7% by the end of 2024. The Federal Reserve succeeds in walking the tightrope to a soft landing by cutting rates twice in the second half of 2024 and continues with cuts until reaching the neutral rate of 2.5% to 3% by 2027.

Job growth slows because current levels of job formation are not sustainable, given demographics and labor force participation. As a result, the unemployment rate falls in the short term, but rises to just under 4% in 2025 before gradually declining through the rest of the forecast period. Major investments prompted by the Inflation Reduction Act provide a boost to manufacturing.³ In addition, investments in intellectual property—such as the use of AI and other novel technologies—will continue to drive growth in the business sector.

Overall, we expect the US economy to post real GDP growth of 2.4% this year, but for growth to slow to 1.1% in 2025. Between 2026 and 2028, economic growth is expected to pick back up, with annual gains in real GDP forecasted to range between 1.6% and 1.9% per year.

Persistent inflation and geopolitical conflicts (20%): While our baseline remains positive, there are always downside risks to any forecast. We see risks centering around three interrelated issues: 1) geopolitical conflicts, 2) persistent inflation, and 3) financial system stress.

Major conflicts in Ukraine and the Middle East have been simmering for some time; either or both could flare up to a higher level. We see the most likely impact of such escalation coming in the form of higher prices of imported goods and oil. In this scenario, the price of oil spikes to around US$100 for three quarters before gradually declining.

Geopolitical conflicts are not just fought with guns. The past two American administrations have used tariffs and sanctions to varying degrees as tools to influence adversaries. The use of these tools can have an impact on the prices faced by American firms and consumers. In this scenario, we model tariffs that increase the cost of imported intermediate inputs by 1% and imported final goods by a further 1%.

As a result of the tariffs and the oil price shock, the Federal Reserve is driven to hike rates twice in the near term. Even with this action, CPI inflation persists above 3% until the second quarter of 2025.

The latest Federal Reserve Financial Stability Report⁴ highlights three near-term risks to the stability of the financial system: higher-for-longer interest rates; worsening geopolitical conflict and spillovers; and strains on real-estate markets, particularly for office real estate. In line with the other assumptions outlined above, we therefore model an increase in stress in the financial system.

In this scenario, GDP growth is lower than in the baseline scenario, particularly over the next two years. Growth in 2024 is 2.2%; by the following year, the tariffs are fully implemented, and growth in 2025 is just 0.6%. Growth averages 1.7% per year from 2026 to 2028.

A golden era for labor markets (10%): AI is today’s popular buzzword, but the increasing sophistication and availability of technology and software has already been replacing some jobs and creating new ones. This kind of transformation will continue—and since technological change is not always linear, there is always the possibility of fast changes that help boost productivity significantly. In this scenario, labor productivity grows at an average of 1.7% per year from 2024 through 2028, compared to 1.4% in the baseline.

In addition to the productivity dividend, population growth increases from an average of 1.8 million per year in the baseline to 1.9 million per year. As a result, the population will be 525,000 larger by 2028. Labor force participation rates will be higher than those in the baseline as older workers postpone retirement. With a larger population base as well as a workforce working longer over time, there will be more people looking for employment—and with demand remaining strong, they will find it. Total employment levels will rise, with faster growth in the outer years of the forecast.

In this scenario, GDP will rise faster than the baseline forecast over the entire forecast horizon. From 2024 through 2028, GDP will increase at an average annual rate of 2.2% per year, 0.5 percentage points higher than the baseline forecast. This scenario also results in higher long-term potential for the economy at 2.3%, compared to 1.7% in the baseline. In that sense, this scenario shows what it would take to make recent rates of economic growth sustainable in the long run.

Sectors

Consumer spending

Despite elevated interest rates and inflation still above the Fed’s target, real consumer spending has consistently exceeded expectations. The current pace of growth is buoyed by households adding new debt and spending the savings they built up during the pandemic. However, we do not expect this level of spending to be sustainable for much longer. According to the Federal Reserve Bank of San Francisco, aggregate excess savings in the United States peaked in August 2021 at US$2.1 trillion and has been declining at an average monthly pace of US$70 billion since September 2021. It is estimated that, as of March 2024, pandemic-era excess savings in the United States have been fully depleted.⁵

In addition, the Conference Board’s Consumer Confidence Index declined for the third consecutive month in April, reaching its lowest level since July 2022.⁶ Dominating consumer concerns in April were elevated food and gas prices, as well as politics and global conflicts.

On the bright side, interest rate cuts later this year may provide more room for consumption to run, as households will have the ability to take on more debt. Although we forecast consumption growth to slow in the second half of this year, for 2024 overall, we expect that consumer spending will rise 2.3% compared to 2023.

There is a big divergence in the forecasts for spending on durable and nondurable goods. During the pandemic, spending on durable goods saw a historic increase since there were fewer opportunities to spend money on nondurables and services like travel or meals out. Although spending on durable goods remained elevated throughout 2023, we expect growth to slow this year. Consequently, we project durables spending will rise by just 1.1% in 2024 and by 0.5% in 2025. On the other hand, spending on nondurables is predicted to be stronger this year and the next, with growth expected to come in at 2.5% in 2024 and 1.4% in 2025. Services spending will grow by 2.7% in 2024 and 1.5% in 2025.

Our headline numbers are already in real (inflation-adjusted) terms, but inflation has an impact on the composition of spending baskets. Recent data from the United States Department of Agriculture suggests that the share of income that households spend on food is now at its highest level in three decades.⁷ That reflects both the fact that food prices have increased faster than other prices, and that households prioritize essentials when having to make cutbacks due to higher prices. As price levels stabilize and wages are adjusted for past inflation, this effect may recede. But, in the meantime, these distributional changes have impacts on the amount of disposable income households have to spend on other items.

Housing

Spring is typically the busiest season for the US housing market. However, with mortgage rates remaining elevated, families who can remain in place are avoiding selling their current homes as they wait for a more favorable borrowing environment, causing the inventory of existing homes to remain low and home prices to continue rising.⁸ According to the National Association of Realtors, the median sales price for existing homes rose 5.7% year over year in April to US$407,600, nearing the highest recorded value of US$413,800, which was reached in June 2022.⁹

Despite a slowdown forecasted for the near term, the good news is that high home prices should lead to higher starts as builders respond. We project over 1.4 million housing starts this year and a further 1.5 million starts in 2025. Over the longer term, housing starts are projected to move closer to 1.6 million. This level of construction is positive; after accounting for depreciation, it means the housing stock will be growing slightly faster than the total population from 2025 until the end of the forecast period. But to have a real impact on affordability, a higher proportion of these homes will need to be “starter homes” and will need to be built in the parts of the country experiencing the strongest population growth and population inflows. We think this will continue to be a challenge, especially in the near term. As a result, we expect the house price index to rise faster than inflation at 4.7% in 2024, before falling to 2.7% in 2025 and remaining between 2.5% and 2.6% over the course of the forecast period.

Business investment

Investment is spending that helps grow the long-term productive capacity of the economy and, as such, is the most important sector for understanding an economy’s potential. One of the challenges of higher interest rates is that while high rates help rein in inflation in the short term by bringing down demand, they can paradoxically cause inflationary pressures to persist for longer by making it more expensive for firms to invest in the capacity to produce more and relieve supply pressures. The average corporate borrowing rate shot up to nearly 7% by the end of 2023, up from a low of 2.3% in 2020. On the bright side, in the first quarter of 2024, the cost of borrowing fell to an average of 6.6% and is predicted to continue declining throughout most of 2024. As a result, although we predict growth in business investment to slow overall in 2024 compared to 2023, average growth for this year is expected to come in at 3% and is predicted to rise further in the medium term.

Like all countries, the United States will have to face the challenges caused by rapidly changing climate conditions. Some of these challenges are from a higher prevalence of extreme weather events such as hurricanes and drought, which lead to loss of life and property from flooding, wildfires, and damage to farmland. Other challenges are related to the need for increased economic investment to prevent even worse effects of warming going forward.

After falling almost 0.3% in 2023, the forecast shows spending on machinery and equipment rising 1.3% this year and 2.7% in 2025. Machinery and equipment expenditures have rebounded to their pre-pandemic levels but have plateaued there. This type of spending—which captures everything from plant machinery to computers and software—typically has had a strong upward trend over time, and we expect that strong trend growth to return by mid-2025.

Investment in structures, which includes both buildings and engineering structures such as power plants and oil platforms, has typically been much more cyclical. Spending here is driven by commodity price booms and economic cycles. Although on the rise since the last quarter of 2022, investment in structures remains below its pre-pandemic peak, which in turn is below the all-time peak in 2008. We expect structures investment to continue rising, growing by 4.2% this year and by a further 1.6% in 2025. However, some sectors are seeing strong investment in structures, while others are facing declines. Mining structures investment is expected to be strong due to elevated oil prices, especially if geopolitical upheaval increases. Likewise, legislation such as the Inflation Reduction Act and the CHIPS and Science Act will likely incentivize investment in manufacturing structures. On the other hand, the outlook for the office segment of the commercial real estate market remains under stress. With office space prices down and vacancy rates up, the office market is likely to remain in a rebalancing phase over the near term, although the prospects for the office market will differ across metro areas.¹⁰

The final major category of business investment is investment in intellectual property, which includes software purchases and research and development spending. Investments in intellectual property increased significantly during the pandemic, especially in software, as firms scrambled to adapt to new remote work realities. Although we expect growth in intellectual property investments to slow from pandemic-era gains, we forecast growth to remain elevated and continue to be the largest driver of growth in business investments overall as many sectors incorporate the use of AI and other technologies.

Foreign trade

Over the past two years, US export volumes have hovered around their pre-pandemic levels, while imports well exceeded pre-pandemic levels by the end of 2021. These dynamics continued into the first quarter of this year, with import growth rising in volume terms and growth in exports slowing.

Globally, the major stories on the trade front continue to be the disruptions in the Red Sea and Panama Canal. Since the beginning of the Israel-Hamas war in October 2023, Houthi forces in Yemen have launched more than 80 attacks on vessels in the Red Sea.¹¹ As a result, major shipping companies have halted or minimized transit through this route, with recent estimates suggesting transits through the Suez Canal (which links the Mediterranean Sea to the Red Sea) have fallen by close to 40% between November 2023 and January 2024.¹² Operators have responded by rerouting traffic from this route to the (much longer) route around the Cape of Good Hope, increasing travel times by at least 10 days.¹³ While the Suez Canal route is less relevant to US exports and imports, the increased transit time on these routes has weighed on global shipping capacity and has resulted in shipping rates having more than doubled since the start of attacks in the Red Sea.¹⁴

More directly relevant to American trade has been the restriction of traffic volumes through the Panama Canal. Since the summer of 2023, due to low water levels, the number of ships and the size of the ships passing through the Panama Canal have been restricted.¹⁵ The Panama Canal route is very important to trade between Asia and the East Coast, and between Europe and the West Coast. Alternatives would require offloading cargo on the “wrong” coast and finding transcontinental rail capacity to move goods. Otherwise, the only alternative is to take the much longer route around Cape Horn. Despite low water levels, since mid-May, the Panama Canal Authority has slowly been increasing the number of transits through the canal ahead of the rainy season.¹⁶ However, climate uncertainty remains, and when combined with the conflict risks, it could potentially lead to a decreased role for maritime shipping in global trade.¹⁷

In our baseline forecast, the Red Sea disruptions won’t get worse, but they won’t get better either. Likewise, the Panama Canal restrictions will remain at current levels and will not tighten further. The combined effects of these restrictions will put upward pressure on prices and prevent inflation from falling as quickly as it otherwise could this year.

However, with the US economy expected to outperform many other global economies in the short term, we forecast import growth to rise, but export growth to slow. In 2024, US imports are predicted to increase 3.1% on average compared to 2023, while exports are predicted to see gains of 2.4%.

Government policy

From a macroeconomic perspective, one of the most important government policies in recent years has been the Inflation Reduction Act.¹⁸ This piece of legislation has provided significant government backing for investments over the next 10 years to address climate change. The act also includes significant revenue provisions (totaling about US$864 billion), and the Congressional Budget Office projects that, by the end of its 10-year life, it will have reduced the federal accumulated deficit by US$77 billion.

After decreasing this year and the next, our baseline forecast projects the federal deficit relative to GDP will hover around 5.6% in the outer years of the forecast period. Beyond this forecast horizon, the deficit as a share of GDP is projected to continue growing, meaning that normal economic dynamics will not balance the budget without policy changes. The continued ability of the federal government to borrow at these levels will depend on investor confidence and global excess savings. Against this backdrop, our forecast assumes that the 10-year federal bond rate will remain elevated and fluctuate between 4.2% and 4.5% over the course of the forecast period. These would be the highest borrowing costs faced by the federal government since 2007, a reflection of the factors just mentioned.

While the potential government shutdown in March was avoided, as expected, Congress has only funded the federal government through September 30, 2024, raising the specter of another showdown at that time.¹⁹ Our forecast does not include any future government shutdowns, but the repeated political wrangling over government funding is a source of risk for the economy. The constant threat of such a shutdown is a disruption to the business of government and a distraction from more important priorities.

Labor markets

The labor market saw strong growth in the first quarter of this year but has started to see a slowdown in employment growth. In April, the economy added 175,000 jobs, below the average monthly gains of 242,000 seen over the past year.²⁰ While labor markets are not as tight as they were during late 2022 and early 2023, the average monthly job growth from February to April (estimated at approximately 242,000) is still above the average monthly growth observed during the last quarter of 2023 (estimated at approximately 212,000). For the first half of 2024, we predict job gains to remain elevated. However, in the last two quarters of this year and throughout most of next, we expect job gains to slow; a slower pace of employment growth lets the unemployment rate rise to above 4% in 2026 in our baseline forecast.

Employment remained above its pre-pandemic peak in April 2024. The participation rate is also approaching its pre-pandemic level. Despite rising to 62.7% in March and remaining constant in April, we project the labor force participation rate to start declining in the second quarter of this year.²¹

In the longer term, demographic transformation will be the main driver of labor supply. Like many developed countries, the United States has an aging population and slowing population growth. Unlike some other countries, however, the United States is not yet at the point where the population growth rate is negative. But the slower rate of growth will act as a restriction on the supply of workers and will force difficult decisions for governments as the share of the population working and paying taxes shrinks. As the population ages, people are moving upward into age brackets with lower rates of labor force participation. At the same time, within most age groups, we are seeing participation rates rise, including among older age groups, who appear to be working into their golden years in greater numbers.²² For now, aging is outweighing the secular increase in participation rates, and we expect the overall participation rate to fall in the long run.

The new demographic realities mean we must recalibrate our expectations for the labor market in the longer term. Relatively low rates of job growth no longer reflect economic weakness so much as a lack of available workers. Between 2000 and 2019, the labor force grew by an average of 0.7% per year. Over the 2024 to 2029 forecast period, we are projecting an average labor force growth of just 0.3% per year. This is a new reality that employers and policymakers will have to learn to grapple with.

Financial markets

The forecast has the Federal Open Market Committee cutting the target rate twice in 2024—once at the September meeting and again at the November meeting—bringing the Fed’s target rate range to 4.75% to 5% by December. Our view is consistent with the general sentiment in markets that the pace and timing of interest rate cuts will not be as aggressive as was once expected. We expect rate cuts will continue at a faster clip in 2025 and 2026 as inflation comes down in earnest, with rates returning to neutral by the first quarter of 2027. Modelling from the New York Fed, and recent comments from the heads of several regional Feds, suggests the neutral rate now rests around 2.5% to 3%.²³ In addition, the Fed does not traditionally allow election cycles to influence its rate policy, and in past election years, it has shown a willingness to cut or hike rates according to the economy’s needs.²⁴ Overall, we predict the Federal Open Market Committee to cut rates a total of eight times over the 2025 to 2026 period, bringing the target rate to 2.75% to 3% by the end of 2026.

Prices

While CPI inflation has declined from its June 2022 peak, it is not falling as rapidly as we previously forecasted. As of April 2024, 12-month CPI inflation was running at 3.4%, which is slightly lower than the 3.5% year-over-year increase recorded in March, but higher than the values recorded at the start of the year. However, 12-month core CPI inflation slowed to 3.6%, down from 3.8% recorded in March and the lowest year-over-year growth captured since April 2021. The Federal Reserve’s preferred measure, personal consumption expenditure inflation, rose slightly in March to 2.7% year-over year growth. While closer to the Federal Reserve’s target of 2%, it is still above the target, and the pace of decrease in inflation has slowed. Getting inflation down near 2% will require more time.

Our forecast therefore assumes that headline CPI inflation will remain above 3% for the first half of 2024, driven in part by temporarily elevated oil prices, before declining steadily starting in the second half of the year. Core inflation is also predicted to decline into the target band by the third quarter of 2024, giving the Federal Reserve room to begin cutting rates starting in the fall of this year.

Our forecast is also based on an assumption that long-term trend inflation will converge to 2%. We do believe the Fed will do everything necessary to make inflation converge to 2%, even if it means a slower pace of cuts—or further rate hikes.

Appendices