Keeping faith in the US consumer
We remain constructive about the US outlook in the coming months, as we think the stars are still aligned for healthy US household consumption. We think the US consumer can weather the withdrawal of the federal boost to unemployment benefits this month. Around USD 2.5 trn of household savings were accumulated during the pandemic, placing the US consumer on a solid financial footing, especially in light of big improvements in the employment picture. We do not think that the Delta variant will derail economic activity. Largely to reflect ongoing supply bottlenecks, we have lowered our forecast for real US GDP growth to 6.1% in 2021--but raised our 2022 GDP forecast to 3.9%.
We have raised our core PCE inflation forecast for 2021 to 2.9%, and we see a similar rate in 2022, as we think services and rents could keep inflation elevated in the coming months.
We assume at this stage that efforts by the Biden administration to push through a USD3.5 trn ‘human’ infrastructure plan will be considerably diluted before it passes into legislation and that it will be accompanied by a moderate increase in corporate taxation (partially reverting the Trump tax cut of December 2017). While fiscal stimulus would be welcome for 2022 GDP, any tax hikes could hurt business and consumer confidence.
We continue to see the Federal Reserve adopting a very gradual approach to the removal of its monetary accommodation, deciding to start tapering its USD120 bn of monthly asset purchases in November (starting with a reduction of USD15 bn per month). We do not see an increase in the feds fund rate before 2023 (possibly in June 2023, rather than our earlier prediction of December 2023).
The ‘big picture’ has not really changed, and we still think that the Fed will seek to be persistently dovish (accommodative). However, the Fed could become more restive in late 2022 should inflation show signs of remaining stuck above, say, 3% because of consistent upward pressure on wages or because of the costs of greening the economy feed into broad-based inflation.