MS - Fast Growth, More Slackpdf
MS - Fast Growth, More Slackpdf
Page 1 of 480
Tyler Durden shared this file. Want to do more with it?
  1. M Foundation US Economics Mid-Year Outlook | North AmericaFast Growth, More SlackMorgan Stanley & Co. LLCEllen ZentnerChief US EconomistEllen.Zentner@morganstanley.com+1 212 296-4882Sam D CoffinEconomistSam.Coffin@morganstanley.com+1 212 761-4630Diego AnzoateguiEconomistDiego.Anzoategui@morganstanley.com+1 212 761-8573Sarah A WolfeEconomistSarah.Wolfe@morganstanley.com+1 212 761-0857Lenoy DujonUS/Canada EconomistLenoy.Dujon@morganstanley.com+1 212 761-2779Faster population growth delivers a positive supply side shock that boosts the economy's potential growth while adding to disinflationary pressures. This bigger — not tighter — economy allows the Fed to start cutting rates in September. Our conviction on three cuts this year remains high.Faster immigration and population growth continue to support economic activity, even as tight monetary policy leads to more labor market slack. We forecast that 2024 GDP growth slows from 3.1% 4Q/4Q (2.5%Y) in 2023 to 2.1% 4Q/4Q (2.6%Y) in 2024, and 2.1% 4Q/4Q (2.1%Y) in 2025.Consumer activity to slow. Consumption continues to decelerate over our forecast horizon due to elevated rates, tight lending standards, and a cooling labor market. After rising 2.7% 4Q/4Q (2.2%Y) in 2023, real PCE slows to 2.2% 4Q/4Q (2.5%Y) in 2024 and 2.2% (2.1%Y) in 2025. The labor market turns a corner as faster immigration expands the labor supply. The mid-pandemic labor market was characterized by shortage, but now labor supply has surged, and demand for labor is likely to moderate. The unemployment rate ends 2024 0.5 point higher than 2023 at 4.2%, rising another 0.3 point to 4.5% in 2025. Weaker inflation prints are forthcoming. After substantial reflation in 1Q24, we expect lower numbers later this year, as rents, goods, and other services inflation will decelerate. We forecast core PCE inflation Q4/Q4 at 2.7% in 2024 and 2.1% in 2025. The Fed holds the policy rate steady at 5.375% from July 2023 until September 2024, when it delivers the first 25bp cut. Three 25bp cuts in 2024 and four by mid-2025 lower the policy rate to 4.625% in 4Q24 and 3.625% in 4Q25. At the same time, the Fed starts phasing out QT in June and ends it in early 2025.The Upside Scenario — A more resilient Chinese economy feeds into higher import prices in the US, keeping the Fed high for longer and weighing on domestic demand. Higher energy prices boost headline CPI through 2025. The pass-through to core goods prices raises core inflation by two tenths this year and next relative to our baseline. There’s demand destruction because of slower disinflation, and consumption is curtailed; at the same time, higher import prices offset a light tailwind to exports. Faster core inflation this year and next pushes off the first Fed cut into late 2024, where we expect one cut at the end of 2024 and 100bp in cuts next year. We forecast GDP growth at 2.0% 4Q/4Q in 2024 and 1.7% in 2025. The Downside Scenario — Persistent services inflation in the US leads the Fed to stay higher for even longer, slowing the economy more significantly. Growth is slightly lower in 2024 as financial conditions remain For important disclosures, refer to the Disclosure Section, located at the end of this report.May 19, 2024 08:00 PM GMT
  2. M Foundation2restrictive, but 2025 sees much weaker growth, below 1% as restrictive policy bites deeper. Growth falling below 1% in 1H25 raises recession fears and inflation begins to decline towards 2.5%. This prompts the Fed to start cutting in June 2025 to lower real rates, delivering 150bp in cuts over the back of the year. We forecast GDP growth at 1.9% 4Q/4Q in 2024 and 0.8% in 2025.
  3. M FoundationMorgan Stanley Research3 Outlook in a NutshellFast Growth, More Slack — Base CaseFaster immigration and population growth continue to support economic activity, even as tight monetary policy leads to more labor market slack. We forecast that GDP growth slows from 3.1% 4Q/4Q (2.5%Y) in 2023 to 2.1% 4Q/4Q (2.6%Y) in 2024, and 2.1% 4Q/4Q (2.1%Y) in 2025. Core PCE inflation falls from 3.2% 4Q/4Q this year to 2.7% in 2024, ending the forecast horizon at 2.1% in 2025. The Fed holds the policy rate steady at 5.375% from July 2023 until September 2024, when it delivers the first 25bp cut. Three 25bp cuts in 2024 and four by mid-2025 lower the policy rate to 4.625% in 4Q24 and 3.625% in 4Q25 (Exhibit 1 & Exhibit 2). Exhibit 1:Growth slows into 2025...1.6%2.4%2.3%2.2%2.1%2.1%2.1%2.1%3.1%2.3%2.4%2.4%2.4%2.5%2.5%2.6%1.5%1.7%1.9%2.1%2.3%2.5%2.7%2.9%3.1%3.3%1Q24A2Q24E3Q24E 4Q24E1Q25E2Q25E 3Q25E4Q25EGDP and Private Final Domestic Demand (%) (QoQ)Real GDPFinal Private Domestic DemandSource: Bureau of Economic Analysis, Morgan Stanley Research forecastsExhibit 2:...as the monetary drag outweighs a fading fiscal impulse4.0%3.0%2.0%1.0%-1.0%2.0%3.0%4.0%5.0%6.0%3Q22 4Q22 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24 1Q25 2Q25 3Q25 4Q25Long-Run Potential Real GDP GrowthGov't Spending EffectGovernment TransfersOther factorsMonetary Tightening effectActual/Forecast Real GDP Growth (QoQ SAAR)MS ForecastSource: Federal Reserve, Treasury, Bureau of Economic Analysis, Morgan Stanley Research forecastsConsumption continues to slow in 2024 and into 2025 as a cooling labor market weighs on real disposable income, elevated rates further pressure debt service costs, and tight lending standards limit credit availability. By mid-2025, lower interest rates are spurring a pickup in housing demand and goods spending. Following an increase of 2.7% 4Q/4Q (2.2%Y) in 2023, real PCE slows to 2.2% 4Q/4Q (2.5%Y) in 2024 and 2.2% (2.1%Y) in 2025. See Consumer Spending .We expect somewhat slower business investment this year than last year, followed by some reacceleration. There are strong crosscurrents: equipment spending eventually turning upward after last year's decline; slower structures investment than last year but at the same time growing more broadly. Bank lending conditions have continued to tighten, but for CRE, there was less incremental tightening at the start of this year than last year. The basic boost to our forecasts comes from faster employment growth, which puts pressure on the existing capital stock. In 2024, business investment slows from 4.6% 4Q/4Q (4.5%Y) to 3.5% 4Q/4Q (3.4%Y), before picking up in 2025 to 3.8% 4Q/4Q (3.8%Y). See Business Investment .
  4. M Foundation4Housing is in short supply. We expect a continued rise in residential investment through 2025, with a rapid rise in housing starts, solid new home sales, and a bit more turnover in existing home sales as mortgage rates fall. Homebuilding and increased brokerage commissions (more volume, still-high prices) keep residential investment on the boil: a 5.5% 4Q/4Q (5.6%Y) rise this year and 3.5% 4Q/4Q (3.2%Y) in 2025.See Housing Outlook. The labor market turns the corner as faster immigration expands the labor supply. The mid-pandemic labor market was characterized by shortage. Now, though, the labor supply has surged, and demand for labor is likely to moderate. Fast immigration has delivered a positive supply shock, allowing rapid employment and income growth, while adding some slack to a tight labor market. Our forecasts for payroll growth are much higher than last November, the unemployment rate is also higher. Payroll gains average 225k this year and 186k next year. The unemployment rate ends this year 0.5 point higher compared to 2023 at 4.2% this year, rising another 0.3 point to 4.5% next year. See Labor Market Outlook . 1Q24 saw substantial reflation, but weaker prints are coming, especially in 2H24.Rents, goods, and other services lead the descent. In recent research we found that residual seasonality also played a role in the recent upswing, suggesting payback in 2H24. We forecast core PCE Q4/Q4 at 2.7% in 2024 and 2.1% in 2025. See Inflation – Disinflation Reboot .The Fed holds policy at a 5.375% peak for this cycle until September 2024, when we expect rate cuts to start. Faster and volatile 1Q24 inflation data has delayed Fed easing, but after renewed evidence of disinflation, we expect the first rate cut in September. The four additional CPI reports before the September FOMC meeting are enough to give the Fed confidence to lower rates. Thereafter, inflation indicators at or below target on a sequential basis, slower GDP growth, and a rising unemployment rate spur the Fed to continue cutting at every meeting through June 2025. Three 25bp cuts this year and four next year leave the funds rate at 3.625% in mid-2025. The Fed has announced it will begin to phase out QT in June, as anticipated; we expect it to end by March 2025. See Monetary Policy. We think federal fiscal expansion has peaked for now. Tax revenues have rebounded, and we have moved past the ramp-up in spending from key bills. The post-election deficit is uncertain, though both parties have achieved most of their policy priorities that had a large impact on the deficit. Important post-election policies that can impact the deficit and economic activity will be tariffs, immigration, and taxes. We forecast the government spending contribution to 4Q/4Q real GDP growth to slow from 0.8pp in 2023 to 0.2pp in 2024 and 0.1pp in 2025.See Fiscal Policy . Exhibit 3 provides the high-level mid-year outlook forecast summary and Exhibit 4 depicts the sector contribution to our GDP growth forecasts. See Full Forecast Table for more detail.
  5. M FoundationMorgan Stanley Research5Exhibit 3:2024 US Economics Year-Ahead Outlook: Forecast Summary 4Q/4Q % change, unless noted2022 2023 2024E 2025EReal GDP0.7 3.1 2.1 2.1 Final Sales1.0 3.5 2.2 2.0 Final Domestic Demand0.8 3.2 2.3 2.2 Final Private Domestic Demand0.8 2.9 2.6 2.5 Personal Consumption Expenditures1.2 2.7 2.2 2.2 Business Fixed Investment5.6 4.6 3.5 3.8 — Structures0.8 16.9 3.8 3.2 — Equipment5.3 -0.6 1.3 2.4 — IPP8.3 3.1 5.5 5.3 Residential Investment-17.4 0.4 5.5 3.5 Trade contribution to growth (pct pts) 0.2 0.2 -0.2 -0.1 Exports4.3 1.8 1.9 2.5 Imports2.1 -0.1 2.9 3.5 Government0.8 4.6 1.0 0.5 Inventory contribution to growth (pct pts) -0.3 -0.4 -0.1 0.0 Civilian Unemployment Rate (4Q average, %) 3.6 3.7 4.2 4.5 Consumer Price Index7.1 3.2 2.9 2.2 CPI ex Food & Energy6.0 4.0 3.3 2.4 PCE Price Index5.9 2.8 2.5 1.9 PCE ex Food & Energy5.1 3.2 2.7 2.1 Fed Funds Target (%, midpoint of target range, eop) 4.4 5.4 4.6 3.6InflationMonetary PolicyLabor marketSource: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Board, Morgan Stanley Research forecastsExhibit 4:2024 US Economics Year-Ahead Outlook: Contributions to percent change in real GDP321-123456321-1234561Q 232Q 3Q 4Q1Q 24 2Q E 3Q E 4Q E 1Q 25 E 2Q E 3Q E 4Q E20232024 E 2025 EContributions to Real GDP (pct pts, annual rate)Business fixed investmentResidential investmentTradeInventoriesGovernmentConsumptionReal GDP-3-2-10123456-3-2-101234561Q 232Q 3Q 4Q1Q 242Q E3Q E4Q E1Q 25 E2Q E3Q E4Q E 2023 2024 E 2025 EContributions to Real GDP (pct pts, annual rate)Business fixed investmentResidential investmentTradeInventoriesGovernmentConsumptionReal GDPNote: The annual measures are a 4Q to 4Q % change or contribution. Source: Bureau of Economic Analysis, Morgan Stanley Research forecastsUpside/Downside ScenariosIn the upside scenario, a more resilient Chinese economy feeds into higher import prices in the US, keeping the Fed high for longer and weighing on domestic demand. Higher energy prices boost headline CPI through 2025. The pass-through to core goods prices raises core inflation by two tenths this year and next relative to our baseline. There’s demand destruction because of the slower disinflation, and consumption moderates while higher import prices offset a light tailwind to exports. Faster core inflation this year and next pushes out the first Fed cut into late 2024, where we expect
  6. M Foundation6one cut at the end of 2024 and 100bp in cuts next year. We forecast GDP growth at 2.0% 4Q/4Q in 2024 and 1.7% in 2025. In the downside scenario, persistent services inflation in the US leads the Fed to stay higher for even longer, slowing the economy more significantly. Growth is slightly lower in 2024 as financial conditions remain restrictive, but 2025 sees much weaker growth, below 1% as restrictive policy bites deeper. Growth falling below 1% in 1H25 raises recession fears and inflation begins to descend towards 2.5%. This prompts the Fed to start cutting in June 2025 to lower real rates, delivering 150bp in cuts over the back of the year. We forecast GDP growth at 1.9% 4Q/4Q in 2024 and 0.8% in 2025. Exhibit 5:2024 & 2025 US Economic Outlook: Upside and Downside Scenarios2023Actual2024 20252024202520242025Real GDP (4Q/4Q)3.1 2.1 2.1 2.0 1.7 1.9 0.8CPI (4Q/4Q)3.2 2.9 2.2 3.3 2.7 3.1 2.3Policy Rate (EOP)5.375 4.625 3.625 5.125 4.125 5.375 3.875BaseUpsideDownsideSource: Bureau of Economic Analysis, Bureau of Labor Statistics, Morgan Stanley Research forecastsWhat Gets the Fed to Hike? What credible scenarios could cause the Fed to alterits path with a hike, either as the next move or as an interruption to a cutting cycle they’d begun?In the scenario where they are cutting and then hike, there’d likely be a lag — a transition between the cuts and a hike that could last some time.Supply shocks would have to change the conditions causing disinflation.•In services, labor supply is important. Policies that slow immigration could have an impact. Although they’d slow both supply and demand, they’d be inflationary at the margin. Trump has raised the possibility of deportations (which he also talked about on the 2016 campaign trail); a swing from rapid immigration to outright outflows would of course have a larger effect.•Don't look to tariffs. There were very little inflationary effects from tariffs in 2018. Dollar appreciation, falling imports from China, and a macro stumble in the US from the hit to manufacturing. Inflation wobbled briefly, but ultimately these effects mitigated the price shock.We could be wrong about current disinflation.We think that labor market conditions support disinflation: a slowly rising unemployment rate and gradually slowing wage inflation. In prices, the 1Q surge reflected noisy categories along with some pressures on insurance that are likely to slacken. See Inflation – Disinflation Reboot . If we’re wrong about 1Q exaggeration, the most likely candidates to cause some pressure are:•In services, healthcare pricesremain strong — demand is rising quickly as are prices, and job openings suggest this is one area of continued labor shortage.
  7. M FoundationMorgan Stanley Research7•In 1Q, most categories' of goods prices actually fell faster than they had been falling. The pickup in goods inflation was limited to three categories (apparel, videotapes, software). Perhaps the broader 1Q price declines were exaggerated and reverse a bit.And of course, the further out, the less certainty. Our rent forecasts (and others) for late next year have wide error bands. In short, the Fed is convinced that they’re restrictive. If progress in disinflation stays stalled, they delay cuts — they’ve told us so, and it’s consistent with this conviction. To hike, conditions have to change enough to persuade them otherwise: a pickup in inflation and evidence from spending and employment that policy was not restrictive.
  8. M Foundation8How We CompareExhibit 6, Exhibit 7, Exhibit 8, and Exhibit 9 compare our 2024-25 forecast for GDP, core PCE inflation, unemployment, and policy rate to the Blue Chip (BC) consensus of economists, as well as the March economic projections of the FOMC. In 2024, on a 4Q/4Q basis, we are significantly higher on growth compared with BC consensus and in line with the Fed; nearly in line on core PCE inflation; and higher on the unemployment rate. In 2025, we're a bit higher on growth, a tenth lower on core PCE inflation, and well above on unemployment.Rapid immigration supports faster employment and output growth, even as tight monetary policy contributes to an increase in labor market slack. The implications of faster population and labor force growth are not well understood, and though the consensus forecast for GDP has increased, a wide gap remains with our 2024 outlook. Chair Powell has acknowledged that population growth has led to a bigger though not tighter economy, and we expect the Fed's June Summary of Economic Projections (SEP) may reflect this more fully as well. Our 2025 forecast includes a sharp slowing in immigration, but policy at home and conditions abroad could change that view.Exhibit 6:GDP forecast comparison2.1% 2.1%2.1%2.0%1.7%2.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%2024 2025Real GDP Growth 4Q/4Q % ChangeMSFOMCConsensus (BC)Co4Q/4QNote: FOMC Projection is from March 2024 Summary of Economic Projections, May 2024 Blue Chip survey.Source: Blue Chip, Federal Reserve Board, Bloomberg, Morgan Stanley Research forecastsExhibit 7:Core PCE inflation forecast comparison2.7%2.1%2.6%2.2%2.8%2.2%0.0%1.0%2.0%3.0%20242025Core PCE Price Inflation4Q/4Q % ChangeMSFOMCConsensus (BC)Note: FOMC Projection is from March 2024 Summary of Economic Projections, May 2024 Blue Chip survey.Source: Blue Chip, Federal Reserve Board, Bloomberg, Morgan Stanley Research forecastsExhibit 8:Unemployment rate forecast comparison4.2%4.5%4.0%4.1%4.1%4.1%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%2024 2025Unemployment Rate4QMSFOMCConsensus (BC)Note: FOMC Projection is from March 2024 Summary of Economic Projections, May 2024 Blue Chip survey.Source: Blue Chip, Federal Reserve Board, Bloomberg, Morgan Stanley Research forecastsExhibit 9:Federal funds rate comparison4.6%3.6%4.6%3.9%4.9%3.9%4.9%4.1%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%5.5%20242025FFR4QMSFOMCConsensusMarket Pricing (As of May 16 2024)Note: FOMC Projection is from March 2024 Summary of Economic Projections, 2024 consensus projection is from May 2024 Blue Chip survey and 2025 consensus projection is from Bloomberg.Source: Blue Chip, Federal Reserve Board, Bloomberg, Morgan Stanley Research forecastsFor the federal funds rate, while we are in line with the Fed's March SEP median of 75bp in cuts this year, the consensus of economists expects 2 cuts this year (50bp) and market pricing (expressed in fed funds futures) currently points to ~2 cuts by the end of this year. By mid-2025 we expect the Fed to deliver four additional cuts, then hold to end the year, with the midpoint of the federal funds rate target range at 3.625% compared to the March SEP and Bloomberg consensus at 3.9% and market pricing at 4.1%.
  9. M FoundationMorgan Stanley Research9Risk to Immigration in 2025Immigration has significant implications for population growth, labor supply, and GDP. In our baseline, we assume that net immigration remains at 3.3 million in 2024 before falling to 2.6 million in 2025 (population growth 0.9%Y), on the way back to its pre-COVID pace closer to 1 million. Breakeven payrolls are 265k in our baseline for 2024 and 210k for 2025.However, there's considerable uncertainty as immigration policy could change. We lay out our five 2025 immigration scenarios and their implications for population growth and breakeven payrolls.The rapid immigration scenario would have flows in 2025 in line with 2023 and 2024 at 3.3 million. This would result in population growth of 1.4%Y, slightly stronger than 2024 due to growth in the native-born population and breakeven payrolls at 265k/month.In our three slower immigration scenarios, net immigration ranges from 1.4 million, which would be aligned with the Bipartisan Border Agreement (BBA) target, all the way to zero. In the BBA scenario, net immigration slowing to 1.4 million would result in 0.8%Y population growth and breakeven payrolls at 135k/year. In the normalized scenario immigration is in line with the pre-COVID average of 800k, with 0.6%Y population growth and breakevens similar to pre-Covid at 87k/month. In the deportation scenario net immigration is at zero, caused by low immigration and a rise in emigration (likely due to stricter deportation policies). The population growth is entirely driven by the native-born population, at 0.2%Y, and breakeven payrolls at 45k. In any post-election outcome, we see stricter immigration policy as highly likely but the extent of changes to immigration policies and enforcement is open to question. The five scenarios outlined in Exhibit 10 include details on policy changes that could be expected in a second Biden or Trump administration. A constriction in labor supply acts as a negative supply shock and would be inflationary. In this scenario, we think the Fed would likely need to keep rates higher for longer, but its reaction would be delayed as negative labor supply slowly begins to feed through into higher inflation.
  10. M Foundation10Exhibit 10:2025 Immigration ScenariosScenarioDeportation NormalizedBipartisan Border Agreement (BBA)Baseline Rapid ImmigrationPopulation Growth 0.2% 0.6% 0.8% 0.9% 1.4%Net Immigration (thous) 0800 1400 2600 3300Nonfarm Payrolls Breakeven45k 87k 135k 210k 265kDescriptionNo net immigration. Population growth reflects native born only.Pre-Covid immigration flows of 800k/year. Breakeven NFP is near pre-Covid rate of ~87k.Bipartisan Border Agreement passed and enforced. Immigration flows slow from 3.3mil to 1.4mil. Breakeven estimated ~135k.Halfway between current immigration flows and Bipartisan Border Agreement. Immigraton slows from 3.3mil to 2.6mil, in-line with CBO. Breakeven estimated 210k.Current immigration flows of 3.3 million persist. Breakeven estimated to be similar to 2024 at 265k.PolicyTrump wins the election and changes immigration policy mainly through executive action: stricter border policy enforced, as well as deporting some migrants who are already in the US and awaiting trials or working.Trump wins election and changes immigration policy: Stricter border enforcement via leverage of executive authorities, excluding actions that courts have previously disallowed + some implementation of new authorities.Trump or Biden wins election and change immigration policy: Limited executive authorities/implementation but Bipartisan Border Agreement curbs crossings Trump or Biden wins election, but no policy change: No new policy change but flows moderate due to either perceived worse conditions for crossing/general deterrence (Trump) or natural moderation/mean reversion (Biden).Trump or Biden wins election, but no policy change.2025 Immigration ScenariosSource: CBO, BLS, Morgan Stanley Research forecasts Immigration Boosts Potential GDP Growth One key variable that guides monetary policy is potential GDP, which measures the level of economic activity consistent with a correct supply-demand balance and inflation at target. GDP levels above potential GDP imply that the economy is overheating and inflationary pressures are building. Like r*, potential GDP is a counterfactual and hard to measure in real time. It requires estimating structural models, and the estimates can vary depending on the structure of each model. Besides, potential GDP can change at high frequency too; changes in the labor force, productivity, tax policy, or incentives to invest can all affect potential GDP.The Fed regularly publishes a longer-run GDP growth estimate, which basically represents trend GDP growth. This estimate can be interpreted as an approximation of potential GDP growth once the effect of near-term factors fades — in other words, a level around which true potential GDP growth fluctuates. The median forecast published in the Summary of Economic Projections has been between 1.8% and 2% since 2015. As we have pointed out in previous research, the US economy has been shocked by an important positive supply shock: immigration. As a result, we updated our population growth estimates meaningfully, moving civilian non-institutionalized population growth from 0.8% to 1.4% in 2023 and 2024, and from 0.7% to 1.1%. And this update has important implications for potential GDP. Larger population due to higher past immigration flows means more production capacity and higher potential GDP levels, which in turn imply a narrower output gap and less inflationary pressures ahead. Also, higher future immigration flows suggest faster potential GDP growth in the next couple of years. How much higher? It is hard to estimate with precision, but the Fed’s estimate of 1.8%-2% can be a useful starting point. Under our assumptions of no meaningful changes in labor productivity growth and labor force participation rates ahead, the elasticity between population and potential growth is just 1. This suggests that the 60bp and 40bp increase in population growth in 2024 and 2025 might move potential GDP to a range of 2.4%-2.6% in 2024 and 2.2%-2.4% in 2025, much higher than the Fed’s current long-run numbers.
  11. M FoundationMorgan Stanley Research11While these estimates naturally entail uncertainty, it's clear that the impact of immigration on potential growth is meaningful over our forecast horizon.
  12. M Foundation12Sector DetailsConsumer Spending Consumption continues to slow in 2024 and into 2025 as a cooling labor market weighs on real disposable income, elevated rates further pressure debt service costs, and tight lending standards limit availability of credit. By mid-2025, lower interest rates are spurring a pickup in housing demand and goods spending. Following an increase of 2.7% 4Q/4Q (2.2%Y) in 2023, real PCE slows to 2.2% 4Q/4Q (2.5%Y) in 2024 and 2.2% (2.1%Y) in 2025 (Exhibit 11).Key drivers of consumer spending:1. Slowing labor market – Demand for labor is slowing as we complete post-Covid backfilling of the work force. Supply outpacing demand is lowering nominal wagepressures. Real disposable income slows sharply this year and slightly more in 2025 off a softening labor market. Less labor income makes servicing debt more difficult. 2. Drag of monetary policy – While households are better cushioned against restrictive policy in this cycle, the effects of tight monetary policy are continuing to weigh on borrowing costs and access to credit throughout 2024, disproportionately affecting durable goods expenditures and lower-income households. In 2025, lower rates, which should support a pickup in housing activity and access to credit, result in a rebound in goods spending. 3. Rising savings rate – The savings rate drifts higher through mid-2025 as high interest rates encourage savings and the desire to spend down excess savings continues to wane. We see a modest drift lower in the saving rate at the end of 2025 off lower interest rates. 4. Population growth – Stronger immigration numbers fuel higher population growth, income, and spending. As a result, real consumption is now growing at a faster pace than previously forecasted in 2024 and 2025, but growth in consumption on a per capita basis is still slowing and should continue to grow at a weaker pace than overall consumption. We dig into details on the characteristics of the new immigration population and implications for consumer spending.Slowing Labor Market A resilient labor market, fiscal stimulus, and aggressive drawdown of savings havefueled consumer spending post Covid, but those peak effects are in the rear-view mirror. In 2023, real disposable income grew by 4.1% 4Q/4Q (4.2%Y) but is on track to slow sharply to 2.5% 4Q/4Q (2.0%Y) this year and 2.4% 4Q/4Q (2.7%Y) in 2025 — reflecting our forecast of slowing job growth and easing wage pressures. Real wage growth (nominal ECI deflated by headline CPI) slows a bit from 0.9% 4Q/4Q in 2023 to 0.7% 4Q/4Q in 2024and 2025.Real wages remain below pre-COVID peaks but are moving back up towards late-cycle levels (Exhibit 12).
We use cookies to provide, improve, protect and promote our services. Visit our Privacy Policy and Privacy Policy FAQs to learn more. You can manage your personal preferences, including your ‘Do not sell or share my personal data to third parties’ setting using the “Customize cookies” button below.