GDP growth is expected to weaken over the next year, then begin to accelerate again as the Federal Reserve cuts interest rates. Growth will be weaker than normal, but still positive, avoiding a recession. This period of slower growth should cool the economy and allow inflation to return to the Fed's 2% target.
GDP measures the size of an economy, specifically the total value of goods and services produced over a given period of time. GDP growth rate indicates how fast a country's economic output is growing.
U.S. real GDP growth accelerated in 2023 despite facing the biggest federal funds rate hike in four decades. However, the contractionary effects of the Fed's rate hikes have not yet fully emerged, and this and other headwinds are expected to cause growth to slow in 2024 and 2025. On an annualized basis, we expect growth to bottom out in 2025.
GDP growth is expected to recover sharply between 2026 and 2028. However, strong supply-side expansion should not result in new inflationary pressures.
For more of our analysis, see our latest Economic Outlook.
Growth has been strong in recent quarters, but we expect it to slow soon.
US real GDP growth has been very strong in the second half of 2023 averaging 4.1% (quarter-on-quarter, annualized). At first glance, the slowdown in growth to 1.4% in Q1 2024 represents our expected slowdown coming to fruition, but not yet. Net exports and inventories dragged down Q1 GDP growth by 1.1 percentage points. These two categories are statistically noisy, so quarter-to-quarter fluctuations are not a good signal of underlying trends.
Excluding net exports and inventories, growth was a solid 2.4%, driven by robust consumption growth (2.5%) and a 5.3% increase in private fixed investment. We also see that real GDP growth rose 2.8% year-on-year in the first quarter. Thus, the strong trend in GDP growth continues as of the first quarter of 2024.
The Atlanta Fed's GDPNow forecasts GDP growth of 2.0% in the second quarter of 2024, reflecting a recovery in inventory accumulation compared to the first quarter.
However, while it is too early to say for certain that a full-blown slowdown has already begun, we believe a slowdown in GDP growth is coming. We expect growth to slow through the remainder of 2024 and into early 2025.
The main factors slowing growth are:
The lagging effects of tight monetary policy include a continued slowdown in credit growth, affecting commercial real estate and other sectors. Government spending growth should slow as state and local surpluses are used up, and federal spending growth is limited by budget agreements. The construction boom in manufacturing structures, spurred by federal subsidies, particularly for semiconductors and electric vehicles, should level off. A decline in household excess savings should restrain consumption.
The most important factor over the next year will be the decline in household excess savings. The personal savings rate is currently at 3.7% (average over the past three months), well below the pre-pandemic (2019) average of 7.4%. Households have been drawing down excess savings accumulated during the pandemic. However, as excess savings decline, the savings rate is expected to trend upward over the next few years, slowing consumption growth.
Depending on our expectations of aggressive Fed rate cuts, the economy could recover strongly in the second half of 2025 and grow strongly from 2026 to 2028. If the Fed waits too long to cut rates, it could trigger a recession, but we believe the Fed will move quickly enough.
Our supply-side view drives our bullish long-term GDP forecast
While we have a somewhat bearish outlook in the near term, we are generally bullish on GDP growth from 2024 to 2028, forecasting cumulative growth of 2 percentage points higher than the consensus forecast due to optimism about labor supply and productivity.
Over the five-year horizon, our GDP forecast is driven by our view of the supply side of the economy, as we assume the Fed will achieve its 2% inflation target and achieve its goal of achieving full employment, which requires the economy to be operating at full capacity (but not more).
On the labour supply side, the labour force participation rate (demographically adjusted) is expected to recover above pre-pandemic levels as widespread job openings attract previously discouraged workers.
We also expect productivity growth to maintain its robust performance on average since the pandemic began: We expect productivity growth to average 1.4% from 2024-2028, in line with the 2020-23 average.
Source: Bureau of Economic Analysis, Morningstar. Data as of June 2024.
This article was edited by Yuyang Zhang and Emelia Fredlick.