Eco Pulse

United States: Towards rate cuts in 2024

12/22/2023
PDF

The ISM Report on Business showed an improvement in non-manufacturing activity in the United States in November, with the corresponding index rising to 52.7 (+0.9pp). Conversely, the ISM Manufacturing index was stable (46.7), as the improvement in new orders was offset by a deterioration in production and employment. This result is consistent with our forecast of a slowdown in the US economy in Q4, with the GDP growth rate edging down to +0.4% q/q according to our forecast (versus +0.6% for the Atlanta Fed’s GDPNow estimate, and +1.3% in Q3). However, the prospect of a recession is gradually receding, and we now expect a single quarter of contraction in 2024 (-0.3% q/q in Q2, with Q1 expected to be flat).

The improved outlook appeared to be having an impact on household sentiment. According to the Conference Board, consumer confidence reached 102.0 in November (+2.9pp), driven by an improvement in expectations (77.8, +5.1pp). In December, the University of Michigan survey also pointed to a jump in household sentiment (69.4, +8.1pp), supported by a better assessment of expectations (66.4, +9.6pp) and current conditions (74.0, +5.7pp).

The slowdown in inflation, as measured by the Consumer Price Index, continued in November but moderately so (+3.1% y/y, -0.1pp). Moreover, core inflation has slightly reaccelerated on a monthly basis (+0.3% m/m, +0.1pp, SA), stabilizing at +4.0% y/y. This development resulted from the momentum in non-housing core services (+4.8% y/y, +0.2pp). As for the labour market, it continues to show a certain resilience, with almost 200k jobs added to the non-farm payrolls, together with a slight increase in the participation rate (62.8%, +0.1pp) and a drop in the unemployment rate (3.7%, -0.2pp).

The last FOMC Meeting of 2023 has unanimously resulted in a target range that was held steady at 5.25% - 5.5%. The last Summary of Economic Projections expects the policy rate to decrease to 4.625% before the end of 2024 (versus 5.125% in previous projections), which corresponds to three 25bps cuts. Markets are forecasting the rate cuts to start as of the March 2024 FOMC Meeting and the Fed funds to get close to 4.0% by the end of 2024. This has contributed to a bond rally, leading the 10-Year Treasury yield to fall below 4.0% for the first time since July.

Anis Bensaidani (article completed on 15/12/2023)

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

Global
EcoPulse - December 2023

EcoPulse - December 2023

The economic picture during November and December reveals some divergence between Europe, on the one hand, and the US and Japan, on the other hand. [...]

Read the article
Eurozone
Eurozone: a difficult end to the year

Eurozone: a difficult end to the year

The end of the year is shaping up to be a difficult one for the eurozone, as displayed by the flash PMI indicators for December. The composite index, fell by 0 [...]

Read the article
Germany
Germany: Stagnation set to continue

Germany: Stagnation set to continue

The business climate indicators highlight a still deteriorated situation, raising fears of another quarter of contraction in activity (-0.1% q/q in Q4 according to our forecasts), following four quarters of stagnation or decline (including -0 [...]

Read the article
France
France: Up against the wall

France: Up against the wall

The signs of the French economy cooling down intensified in December, with a further fall in the flash composite PMI to 43.7 (44.6 in November) [...]

Read the article
Italy
Italy: Activity is slowing down, as is inflation

Italy: Activity is slowing down, as is inflation

Economic growth is slowing down in Italy. After contracting by 0.4% q/q in Q2, economic activity only grew by 0.1% q/q in Q3, almost standing still in that quarter. This small rebound was led by consumer spending (+0.6% q/q, contribution of 0 [...]

Read the article
Spain
Spain: Growth falters, but the outlook remains encouraging

Spain: Growth falters, but the outlook remains encouraging

Contrary to the trend observed in the other three major eurozone countries, Spain recorded a more moderate fall in inflation in November. According to the INE, the growth in the Harmonised Index of Consumer Prices (HICP) slowed by 0.2 pp to 3 [...]

Read the article
United Kingdom
United Kingdom: Growth relapses, the housing market stabilizes

United Kingdom: Growth relapses, the housing market stabilizes

With the more pronounced disinflation of consumer prices and wages, the Bank of England’s decision to keep the bank rates unchanged at its meeting on 14 December was widely expected [...]

Read the article
Japan
A difficult Q3, but a more positive outlook

A difficult Q3, but a more positive outlook

The revision of Japanese growth figures was unfavourable, resulting in a greater decline in GDP in Q3 than initially estimated (-0.7% q/q versus -0.5% q/q) [...]

Read the article