US GDP Outlook: Is the cooling economy good news?

At 20:30 on Thursday Beijing time, the United States will release the initial annualized quarterly real GDP for the second quarter, with the market's consensus expectation at 2%.

The U.S. economy is cooling down, inflation is slowing, job vacancies are increasing, consumer spending is decreasing, and borrowing is increasing. While these dynamics may seem worrying at first glance, analysts say they still indicate that the U.S. economy is moving in the right direction.

Analysts say the decline in inflation and the loose labor market have strengthened the Fed's confidence in cutting interest rates this year. This will end one of the most aggressive policy tightening cycles in modern history. Rate cuts will make borrowing cheaper, and are often beneficial for both the stock market and consumers. Previously, this tightening cycle helped control inflation and achieve a better balance between supply and demand after years of turbulence.

The question now is whether the U.S. economy can achieve a soft landing, and whether today's sustainable slowdown will turn into tomorrow's recession.

Sameer Samana, Senior Global Market Strategist at Wells Fargo Investment Research Institute, said, "The economy is slowing down, and the slowdown is justified."

Both U.S. CPI and core CPI are declining

Why is a slowdown in the U.S. economy good news?

Rapid economic growth is rarely beneficial for financial markets or consumers. "In recent years, the economy has been growing positively, but profit growth has remained flat," Samana explained. After the pandemic, "growth has been so amazing, and it has occurred in a situation of supply chain dislocation and labor market scarcity, to the point where companies cannot actually generate any profits from it." He said that consumers have also suffered losses in "significant price increases."

Slowing consumer spending drags down GDP growth

Brian Rose, Senior U.S. Economist at UBS Global Wealth Management, said that the slowdown in the economy is largely attributed to the decrease in consumer spending. He stated that the excess savings brought about by the pandemic have been depleted, "and we are back to signs of pressure, especially among low-income families."

As consumer spending accounts for about 70% of U.S. economic activity, the slowdown in consumer spending growth has become a major driver of economic growth slowdown. GDP growth has declined from 4.9% in the third quarter of 2023 to 1.4% in the first quarter of this year. According to FactSet data, although economists expect second-quarter GDP growth to be close to 2%, this still reflects a slowing trend.

U.S. GDP growth is gradually slowing down

"We have transitioned from a period of above-trend growth to a period of below-trend growth," Rose said. He expects the economy's potential growth rate to be around 2%. "The good news is that below-trend growth helps alleviate inflationary pressures." This is exactly what the Fed wantsThis slowdown does not mean that the economy will run into trouble. Many analysts believe that this weakness is limited to middle- and low-income consumers, indicating that they will bargain more rather than drastically reduce spending. American Bank analysts led by economist Michael Gapen wrote, "Retail sales unexpectedly rose in June, consistent with our view that American consumers have not stopped spending."

Meanwhile, Scott Anderson, Chief U.S. Economist at Montreal Bank Capital Markets, pointed out that "record household wealth, increasing disposable income, and relatively low unemployment rates are significant drivers for consumers." In a report to clients on Friday, he wrote that this support "should keep the economy growing moderately to moderately in the coming months."

Loose Labor Market

Analysts say that the other side of the "coin" of inflation is the labor market, which has been significantly soft over the past two years but remains healthy. According to data from the U.S. Bureau of Labor Statistics, job vacancies have decreased from about 12 million in March 2022 to about 8 million in May this year. At the same time, the unemployment rate has risen from a low of 3.4% in December 2022 to 4.1% in June.

Unemployment rate drops to pre-pandemic levels and then rebounds slightly

During a recent congressional hearing, Federal Reserve Chairman Powell described the labor market as "having returned to pre-pandemic levels: strong, but not overheated." He noted that while the unemployment rate is higher than two years ago, it remains relatively low from a historical perspective. He stated that the economy continues to create employment opportunities healthily, wage pressures are easing, helping to reduce inflation.

Analysts at Bank of America unanimously agree that "no layoffs indicate that the labor market is normalizing rather than weakening." Ross stated that this type of labor market "more or less 'completed' the task for the Fed," meaning that the Fed "has balanced the labor market without a recession."

Risks Facing the Outlook

Both Ross and Samana expect the U.S. economy to achieve a soft landing, but they acknowledge that the risks are skewed to the downside, meaning that an economic slowdown could be too severe, leading the U.S. into a recession.

Ross said, "If labor demand remains weak, we may start to see more layoffs and a faster rise in the unemployment rate, which is what the Fed wants to avoid." "They are concerned that if they maintain high rates for a long time, layoffs may start to accelerate, increasing the risk of a hard landing."

He said, "Another danger signal to watch for is a sudden increase in the savings rate." This would indicate reduced spending, potentially prompting businesses to slow down hiring and pave the way for an economic recessionSamana added that a sudden economic slowdown will trigger various forms of interest rate cuts - the Federal Reserve will realize that maintaining high interest rates for too long has led to policy mistakes