Outlook deteriorates After GDP growth accelerated in Q4 due to stronger domestic demand, momentum has likely waned in Q1 as the latest Covid...

United States Economic Growth Outlook Deteriorates

Outlook deteriorates
After GDP growth accelerated in Q4 due to stronger domestic demand, momentum has likely waned in Q1 as the latest Covid-19 wave and elevated price pressures drag on economic sentiment. Nevertheless, growth should have remained relatively healthy. The unemployment rate ticked up in January and consumer confidence continued to fall in February, which should be dragging on private consumption somewhat. Moreover, the manufacturing PMI averaged lower in January–February relative to Q4.

Meanwhile, the Chicago Fed National Activity Index—a leading indicator for GDP—eased in February, but continued to suggest a pick up in activity in sequential terms. On a brighter note, in February the labor market tightened and industrial production growth gained momentum. In other news, the U.S. continued to toughen sanctions on Russia in recent weeks, while also warning Beijing against providing military assistance to Russia.

GDP growth is projected to increase at a softer pace in 2022 due to a less favorable base effect. That said, activity should remain strong as upbeat private spending and investment support domestic demand conditions. Uncertainty over new Covid-19 variants, tighter monetary policy and ongoing tense relations with China pose downside risks. FocusEconomics panelists see GDP growing 3.4% in 2022, which is down 0.3 percentage points from the previous month’s forecast. In 2023, our panel sees the economy expanding 2.4%.

Inflation increased to 7.9% in February from 7.5% in January. Inflation is seen overshooting the Fed’s 2.0% target in 2022 due to a healthier domestic economy. Moreover, inflation is expected to accelerate from last year’s level as elevated commodity prices and some renewed supply chain disruptions stoke price pressures. FocusEconomics panelists see inflation averaging 6.3% in 2022, which is up 1.3 percentage points from last month. In 2023, our panel expects inflation to average 2.7%.

At its 15–16 March meeting, the Fed raised the target range from 0.00%– 0.25% to 0.25%–0.50%, in a bid to tame price pressures. The move was in line with market expectations. Moreover, the Fed said that its decision to reduce its QE purchases will be determined later this year. The majority of our panelists see several more rate hikes before the end of the year. Our panelists project the federal funds rate to end 2022 at 1.73% and 2023 at 2.39%.

The dollar index strengthened in recent weeks, likely due to a more hawkish Fed and market expectations for more rate hikes in 2022 than previously expected. On 25 March, the dollar index traded at 98.8, up 2.3% month-on-month. Looking ahead, the course of the pandemic, geopolitical tensions and the trajectory of the U.S. 10-year yield rate are factors to watch.

ISM manufacturing index increases in February The Institute for Supply Management (ISM) manufacturing index increased from 57.6 in January to 58.6 in February. Consequently, the index moved further above the 50-threshold signaling a slightly stronger improvement in manufacturing activity over the previous month. February’s stronger expansion was predominately driven by higher new orders and production growth relative to the previous month. That said, employment levels rose at a softer rate in February. Meanwhile, price pressures also increased at a slower pace in February. FocusEconomics Consensus Forecast panelists expect industrial production to increase 4.1% in 2022, which is down 0.1 percentage points from last month’s forecast. In 2023, panelists see industrial production rising 2.2%. FocusEconomics Consensus Forecast panelists expect GDP to grow 3.4% in 2022, which is down 0.3 percentage points from last month’s estimate. For 2023, the panel expects the economy to expand 2.4%.

Retail sales growth moderates notably in February Retail sales increased 0.3% in month-on-month seasonally-adjusted terms in February, which was softer than January’s 4.9% jump. February’s moderation was primarily due to a weaker rise in purchases of automobiles, while purchases of food and beverages declined relative to the previous month. On an annual basis, retail sales rose 17.6% in February, which was up from January’s 14.0% expansion. Meanwhile, annual average retail sales growth rose to 20.7% in February (January: +19.8%). Commenting on the latest print with regards to the monetary policy outlook, Katherine Judge, senior economist at CIBC World Markets, noted: “The January revisions show that the US economy was even more resilient during Omicron than thought, and add to the urgency for Fed rate hikes, as we expect the weak goods print for February to be offset by renewed demand for services as Omicron faded. The control group of sales is still 16% above where its pre-pandemic trend growth rate would have put it as of February, and we expect that degree of excess on the goods side of the economy to be pared back as services demand accelerates.” FocusEconomics Consensus Forecast panelists see private consumption growing 3.3% in 2022, which is down 0.3 percentage points from last month’s forecast. For 2023, the panel sees private consumption increasing 2.4%.

Labor market tightens further in February Total non-farm payrolls increased by 678,000 in February, following January’s 481,000 increase in payrolls. Employment gains occurred in professional and business services, and leisure and hospitality. The unemployment rate ticked down slightly from 4.0% in January to 3.8% in February, while the labor force participation rate increased to 62.3% in February—the highest level since March 2020—up from January’s 62.2%. Hourly earnings were flat month-on-month in February (January: +0.6% mom), while annual wage growth dipped to 5.1% from 5.5% in January.

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