The Q3 2024 forecast indicates how robust consumer spending, high business investment, and lower interest rates have kept optimism about the US economy intact. However, risks like geopolitical tensions and persistently high inflation remain.
Despite persistent concerns surrounding the durability of growth and interest rate policy, the US economy remains fundamentally strong. While real gross domestic product growth slowed in the first quarter of this year, growth rebounded to a strong 3.0% in the second quarter. All available evidence suggests policymakers may have managed to bring inflation under control without causing a recession.
Deloitte’s baseline scenario remains relatively positive. The boom in factory construction will continue to boost the economy’s potential in the coming years. In the short term, a faster pace of interest rate cuts by the Fed should allow households to take on more debt and support continued growth in consumer spending. Coupled with elevated government consumption, we expect the US economy to grow by 2.7% this year.
In addition to this relatively positive baseline scenario, we include two alternate scenarios: an upside scenario where positive structural changes to the labor market occur in the long run and labor productivity gains exceed our baseline forecast, and a downside scenario that highlights the potential of geopolitical conflict and trade policy to stoke persistent inflation.1
Scenarios
Baseline (60%): Real GDP growth came in stronger than expected in the second quarter of 2024, after slowing in the first quarter. The contrasting results were caused by a big drawdown in inventories in the first quarter, followed by their replenishment in the second quarter; on average, GDP grew at a reasonably strong pace of 2.2% through the first half of this year. We expect GDP to continue growing at a similar pace throughout the remainder of this year before slowing in 2025.
Overall, the story for the US economy remains positive. Consumer spending keeps coming in stronger than expected and is forecasted to rise 2.4% in 2024, slightly more than the 2.2% increase recorded last year. Business investment is predicted to rise 4.2% in this year, down only slightly from the 4.5% growth recorded in 2023. The Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act are predicted to keep driving strong gains in structures and machinery and equipment investments, while firms continue to heavily invest in software and other intellectual property like artificial intelligence. On the trade front, growth in exports is expected to slow to 2.2% in 2024 before picking up again the following year, while imports are forecasted to increase 3.8% this year. Government spending is predicted to rise 2.9% in 2024.
Consumer price index (CPI) inflation finally fell below 3.0% in July and is expected to continue decreasing, hitting 2.7% by the fourth quarter. Job growth is forecasted to continue slowing, and we expect demographic changes to continue driving down the labor force participation rate. The unemployment rate has risen to its highest level since October 2021. With inflation on the decline and the unemployment rate on the rise, the Federal Reserve is on track to begin cutting rates in September. We predict the target rate to fall 100 basis points this year and a further 100 basis points in 2025.
Overall, real GDP is expected to increase 2.7% in 2024 and by 1.5% in 2025. Between 2026 and 2028, real GDP growth is forecasted to hover between 1.7% and 2.1% per year.
Persistent inflation and geopolitical conflicts (20%): While our baseline remains positive, there are always downside risks to any forecast. We see risks centering around two interrelated issues: 1) geopolitical conflicts and 2) trade policy, which could combine to yield persistent inflation.
Conflicts in Ukraine and the Middle East are at risky stages, and the possibility of escalation is high. Both conflicts are in regions with major petroleum production, and so one likely outcome of escalation could come in the form of higher oil prices. In this scenario, the price of oil rises and remains about US$10 above baseline throughout 2025.
Geopolitical conflicts are not just fought with weapons; trade policy is increasingly a battleground for competition. The US presidential election is in full swing, and both major party candidates appear poised to pursue some degree of tariffs on foreign imports. Though the precise effects depend on the tariff design and implementation, these policies will likely impact prices faced by American firms and consumers. Therefore, in this scenario, we model tariffs that increase the cost of imported intermediate inputs by 1% and of imported final goods by a further 1%.
As a result of the tariffs and the oil price shock, CPI inflation persists above 3% until the third quarter of 2025. Although this scenario still has the same September rate cut as in the baseline scenario, the increased inflationary pressures in late 2024 and 2025 mean the Fed is unable to cut rates further until the end of 2025.
In this scenario, GDP growth is lower compared to the baseline scenario, particularly over the next two years. Growth in 2024 is 2.6%; by the following year, the tariffs are fully implemented and growth in 2025 is just 1.0%. Growth then averages 2.0% per year from 2026 to 2028.
A golden era for labor markets (20%): Over the past few years, firms have been investing heavily in software and technology. Some of these investments—like those in AI—offer the potential to transform certain types of work. Based on an optimistic view of the uptake and usefulness of new technologies, this scenario sees productivity growing by an average of 1.8% per year from 2024 through 2028, compared to 1.5% in the baseline.
In addition to the productivity dividend, this scenario sees higher population growth, contributing to an overall population that is 1.1 million larger than in the baseline scenario by the end of the forecast. Along with a bigger population, we model a higher labor force participation rate, as workers continue to delay retirement. Together, these dynamics result in a higher supply of labor for the economy. More workers lead to more output and more spending in a virtuous circle that lifts the overall economy.
In this scenario, GDP will rise faster than the baseline forecast over the entire forecast horizon. From 2024 through 2028, GDP will increase at an average annual rate of 2.5% per year, 0.5 percentage points higher than the baseline forecast. This scenario also results in higher long-term potential for the economy at 2.8%, compared to 2.2% in the baseline. In that sense, this scenario shows what it would take to make recent rates of economic growth sustainable in the long run.