Labour market strength boosts U.S. outlook: S&P

In the face of continued strength in the U.S. labour market, S&P Global Ratings is boosting its economic forecast for 2024.

The rating agency hiked its forecast for U.S. real GDP growth for the year to 2.4%, up from its previous call of 1.5%. The revised forecast is more or less in line with estimated growth of 2.5% for 2023.

“Better-than-anticipated real GDP growth in the fourth quarter of 2023 and a jobs market that appears sturdier than implied just one month ago led us to revise up our forecasts,” S&P said.

The stronger-than-expected growth in the latter half of 2023 came amid surprising strength in “net exports, government spending and the pace of inventory accumulation,” it said.

“Beyond favourable year-end base effects, economic activity in the first quarter of 2024 has been running warmer than we anticipated,” S&P said. “Consumer spending is benefiting from a strong labour market.”

In January the U.S. economy added 353,000 net new jobs, and the jobs data for December was revised up significantly, “reversing the downward trend of earlier months,” it said. Also in January, average hourly earnings growth was double expectations.

“The labour market continues to create jobs, while wage gains remain above the rate of inflation, leading to sustained purchasing power for consumers,” it said.

Despite the revised growth picture, S&P has not changed its outlook for U.S. monetary policy, as it still anticipates inflation cooling in the months ahead.

“Progress toward lower inflation will likely be slow since the initial benefits of normalizing supply conditions are behind us and since consumer demand isn’t wilting away as fast as previously expected,” it said.

There are also upside risks to inflation, such as a weakening in labour productivity, or geopolitical conflicts, that could reignite price pressures, it cautioned.

That said, S&P continues to forecast that core inflation will finally fall closer to the U.S. Federal Reserve Board’s 2.0% target by the middle of the year.

Against that backdrop, it still expects the Fed to start cutting rates in June, with an initial cut of 25 basis points. And it continues to see 75 basis points in rate cuts by the end of 2024.

“The risk is that, if some of the disinflation of the past year does turn out to be temporary, it would reduce the appeal of lowering interest rates as much as is currently priced in,” it said.