The
US
economy
is
cooling
off.
Inflation
is
slowing
and
job
openings
are
rising.
Consumers
are
spending
less
and
borrowing
more.
While
those
dynamics
might
seem
worrying
at
first
glance,
analysts
say
they’re
signals
the
economy
is
moving
in
the
right
direction.
Analysts
say
the
combination
of falling
inflation and
a loosening
labour
market bolsters
the
Federal
Reserve’s
confidence
for
an
interest
rate
cut
this
year.
That
would
end
one
of
the
most
aggressive
policy-tightening
cycles
in
recent
history.
Lower
rates
make
borrowing
cheaper
and
tend
to
be
a
tailwind
for
both
stocks
and
consumers.
That
tightening
cycle
helped
control
inflation
and
brought
supply
and
demand
into
better
balance
after
the
upheaval
of
the
past
few
years.
The
question
now
is
whether
the
economy
can
coast
to
a
soft
landing
or
if
today’s
sustainable
slowdown
will
become
tomorrow’s
recession.
“Things
are
slowing,
and
they’re
slowing
for
the
right
reasons,”
says
Sameer
Samana,
senior
global
market
strategist
at
the
Wells
Fargo
Investment
Institute.
Why
a
Slowdown
Is
Good
News
Overly
hot
economic
growth
is
rarely
good
for
financial
markets
or
consumers.
“The
last
couple
of
years,
economic
growth
has
been
positive,
but
profit
growth
has
been
basically
flat,”
Samana
explains.
Coming
out
of
the
pandemic,
“growth
was
so
overwhelming
and
came
at
a
time
of
such
weird
supply
chain
dislocations
and
labour
market
scarcity
that
companies
weren’t
able
to
actually
generate
any
profitability
off
of
it”.
Consumers
suffered
too,
he
says,
amid
“massive
amounts
of
price
inflation”.
Slowing
Consumer
Spending
Weighs
on
GDP
Growth
Much
of
the
slowdown
in
the
economy
is
attributable
to
a
pullback
in
consumer
spending,
according
to
Brian
Rose,
senior
US
economist
at
UBS
Global
Wealth
Management.
He
says
excess
savings
from
the
pandemic
have
been
exhausted
and
“we’re
back
to
signs
of
stress,
especially
among
lower-income
households”.
Since
consumer
spending
accounts
for
roughly
70%
of
US
economic
activity,
this
moderation
is
a
major
driver
of
slowing
economic
growth.
GDP
growth
has
fallen
from
4.9%
in
the
third
quarter
of
2023
to
1.4%
in
the
first
quarter
of
this
year.
While
economists
expect
second-quarter
GDP
growth
to
come
closer
to
2%,
according
to
FactSet,
that
would
still
reflect
a
moderating
trend.
“We’ve
gone
from
a
period
of
above-trend
growth
to
below-trend
growth,”
Rose
says.
He
estimates
the
economy’s
potential
growth
rate
to
be
about
2%.
“The
good
news
here
is
that
below-trend
growth
helps
to
relieve
inflationary
pressure.”
That’s
exactly
what
the
Fed
wants.
That
slowdown
doesn’t
mean
trouble
for
the
economy.
Many
analysts
say
the
weakness
is
confined
to
low-
and
middle-income
consumers,
and
that
it
points
to
more
bargain-seeking
behaviour
rather
than
a
total
deceleration
of
spending.
“June
retail
sales
surprised
to
the
upside,
fitting
our
view
that
the
US
consumer
has
not
checked
out,”
Bank
of
America
analysts
led
by
US
economist
Michael
Gapen
wrote
Friday.
Meanwhile,
BMO
Capital
Markets
chief
US
economist
Scott
Anderson
points
to
record-high
household
wealth,
rising
disposable
income,
and
relatively
low
unemployment
as
“considerable
tailwinds”
for
consumers.
That
support
“should
keep
the
economy
growing
at
a
modest
to
moderate
pace
in
the
months
ahead”,
he
wrote
in
a
note
to
clients
on
Friday.
Labour
Market
Loosening
On
the
other
side
of
the
inflation
coin
is
the
labour
market,
which
has
softened
considerably
over
the
past
two
years
but
remains
healthy,
according
to
analysts.
Job
openings
have
fallen
from
roughly
12
million
in
March
of
2022
to
about
8
million
in
May
of
this
year,
according
to
data
from
the
Bureau
of
Labor
Statistics.
At
the
same
time,
the
unemployment
rate
has
risen
from
a
low
of
3.4%
in
December
2022
to
4.1%
in
June.
In
recent testimony to
Congress,
Fed
Chair
Jerome
Powell
described
the
labour
market
this
way:
“Conditions
have
returned
to
about
where
they
stood
on
the
eve
of
the
pandemic:
strong,
but
not
overheated”.
He
pointed
to
how
the
unemployment
rate,
while
higher
than
two
years
ago,
is
still
low
from
a
historical
perspective.
He
says
the
economy
is
still
creating
jobs
at
a
healthy
clip,
and
wage
pressures
are
also
easing,
helping
bring
inflation
down.
Bank
of
America’s
analysts
agree:
“The
absence
of
layoffs
suggests
this
is
a
labour
market
that
is
normalizing
and
not
weakening.”
This
type
of
labour
market
is
“more
or
less
‘mission
accomplished’
for
the
Fed”,
Rose
says,
meaning
the
central
bank
has
“gotten
the
labour
market
back
into
balance
without
a
recession”.
Risks
to
the
Outlook
Both
Rose
and
Samana
expect
a
soft
landing,
but
they
acknowledge
that
risks
are
skewed
to
the
downside
–
meaning
it’s
possible
the
slowdown
could
go
too
far
and
tip
the
economy
into
a
recession.
“If
the
demand
for
labour
keeps
weakening,
then
maybe
we’re
going
to
start
to
see
more
layoffs
and
a
more
rapid
increase
in
the
unemployment
rate,
which
the
Fed
would
like
to
avoid,”
Rose
says.
“Their
concern
is,
if
they
leave
rates
too
high
for
too
long,
then
maybe
layoffs
will
start
to
accelerate
and
the
risks
of
a
hard
landing
would
increase.”
He
says
another
red
flag
to
watch
for
is
a
sudden
increase
in
the
savings
rate.
That
would
indicate
a
pullback
in
spending,
which
could
prompt
businesses
to
slow
hiring
and
pave
the
way
for
a
recession.
Samana
adds
that
a
sudden
economic
slowdown
would
prompt
a
different
flavour
of
rate
cut
–
one
wherein
the
Fed
realises
it’s
made
a
policy
mistake
by
keeping
rates
too
high
for
too
long.
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