The U.S. economy will continue to expand through 2024 but at a slower pace than previously expected, according to the American Bankers Association’s Economic Advisory Committee.
The committee, which consists of 13 leading economists from the largest U.S. banks, projects 1.6 percent and 1.5 percent inflation-adjusted, year-over-year GDP growth for 2022-23, respectively, far lower than the 5.5 percent GDP growth in 2021.
Though the EAC initially projected that containing Covid-19 would lead to above-trend growth, those expectations were diminished as supply chain troubles became a major issue again due to Russia’s invasion of Ukraine and a Covid-19 wave enveloping Asia.
Despite those challenges, the EAC expects U.S. real consumer spending will increase 2.5 percent this year and 1.8 percent in 2023. Those increases, along with low unemployment and the extraordinary amount of money Americans saved during the pandemic, are expected to buoy the economy.
Business investment is expected to rise by 6.2 percent this year, before falling to less than 3 percent in 2023. Inventory accumulation is expected to slow. “Labor shortages have constrained production, spurring firms to invest in technology to increase efficiency,” the EAC stated in the June 3 forecast. “At the same time, profit margins are strong and supply chain conditions are expected to improve, which should mitigate inflation pressures somewhat.”
The EOC expects the Fed to increase its federal funds target rate by another 150 basis points this year followed by 50 more early in 2023. Committee Chair Richard DeKaser said the Fed will slow its pace of interest rate hikes once the Fed funds rate reaches 3 percent in the middle of 2023. The economists expect inflation will gradually weaken toward the Fed’s 2 percent objective over the next two years. The EAC projects inflation will fall to 6.3 percent in the fourth quarter of this year, before being reduced to 2.4 percent late in 2023.
As the Fed brings down inflation, the EOC says there is a 40 percent chance of a recession next year. “Over-tightening by the Federal Reserve, stubbornly elevated inflation, little resolution to supply chain problems, or a housing correction could tip the economy into a downturn,” the economists wrote.