The US will still experience a short contraction in 2023
Given the American economy’s strong start to 2023 and the still-tight labor market, MNCs should delay their expectations of a contraction in consumption (and therefore GDP) until Q3 2023, followed by a recovery later in the year and into early 2024. MNCs will also likely continue to face difficulties in finding and hiring staff, as well as pressure to provide inflation-matching pay rises.
While the current turbulence in the financial sector is unlikely to lead to a major crisis such as the one seen in 2008, it will likely lead to some level of self-restraint among lenders, notably in the form of tighter conditions for loans—this will limit both consumers’ and businesses’ ability to borrow. Firms planning CAPEX investments should factor this into their 2023 plans. Meanwhile, MNCs selling big-ticket items often bought on credit, such as autos, furniture, or electric appliances, should expect tighter financial conditions and high inflation to weigh on demand.
Overview
- The US economy continues to perform better than expected: in particular, consumer spending (which accounts for 70% of GDP) has remained robust, buoyed by a still-tight labor market, as well as credit-fueled spending.
- This has slightly improved our outlook for consumer spending and GDP for 2023.
- However, FrontierView still expects the US economy to experience a short and shallow contraction, likely starting around Q3 2023.
- It will be driven by persistently high inflation, continued interest rate hikes by the Federal Reserve, and the tightening of lending conditions by US banks following the recent turmoil in the financial sector.
Our View
FrontierView’s outlook for GDP growth in the US in 2023 has slightly improved, increasing from 0.5% to 0.7% YOY. This is predominantly thanks to surprisingly robust consumer spending in the first quarter, which was supported by a historically strong labor market that is keeping Americans in work and boosting their wages.
However, several signs point to a slowdown in consumer spending, which will likely bottom out in Q3 2023. The savings Americans amassed during the pandemic, which were the result of fiscal stimulus and forgone spending and have proved to be a major tailwind to consumer spending, have all but disappeared. To maintain their inflation-eroded purchasing power, Americans are increasingly turning to their credit cards. However, continued rate hikes by the Fed will increase borrowing costs, while the recent turmoil in the financial sector will damage consumer confidence and lead banks to tighten their lending standards. The effect of this will be most acute on sales of big-ticket items, which are often purchased on credit.
Although it will contract in 2023, and therefore act as a drag on growth, the outlook for investment in the US has slightly improved. The Purchasing Managers’ Index (PMI) for the American manufacturing sector, while still firmly in contraction territory, has shown signs of recovering in recent months, as falling producer prices cushion the blow of higher borrowing costs. Meanwhile, the housing sector, a major victim of the rapid increase in interest rates, is showing tentative signs of stabilizing: a slight fall in both mortgage rates and house prices helped the sector break its 12-month streak of falling sales, while improving sentiment among homebuilders is helping housing starts. Still, it must be stressed that investment in 2023 will continue to suffer from historically tight financial conditions, uncertainty in financial markets, and subdued business confidence.
Finally, FrontierView’s expectations for inflation in 2023 have increased, from 4.0% to 4.6% YOY. While the major contributors to inflation in 2022 (food, fuel, and used cars) have all showed signs of easing, there is concern over the stickiness of “core inflation,” notably in services. This is the result of the extremely tight labor market, which is forcing employers to compete on wages and fueling inflationary wage growth. As a result, inflation is unlikely to fall to the Fed’s desired level of 2% until at least 2024.
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