Key Trends and Future Projections for 2024-2025
The US banking industry has faced financial stress after the collapse of Silicon Valley, Signature, and First Republic Banks. This is partially because a small number of institutions control the majority of banking industry assets.
Real gross domestic product (GDP) increased at an annual rate of 1.3 percent in the first quarter of 2024, according to the "second" estimate. In the fourth quarter of 2023, real GDP increased 3.4 percent.
Bank failures can cause depositors to worry about the stability of the financial industry and lead to general market volatility.
The state of the U.S. economy is strong despite inflation remaining elevated. The economy is expanding at a crisp pace, unemployment is low, inflation is slowing from its peak.
As the US banking industry continues to consolidate through mergers and acquisitions, how have assets among banks changed over time, and which institutions hold the most money?
How have bank assets changed over time?
By the end of 2022, banks in the US owned a combined $22.3 trillion in assets, up 32% over the last decade after adjusting for inflation.
Over half of bank assets are net loans and leases, followed by investments and cash and due, which refers to the money a bank has on hand. The rest is made up of other investments, property, equipment, or certain intangible assets, such as intellectual property.
On Monday, the Institute for Supply Management (ISM) said its manufacturing index dropped to 48.7% in May, compared to April’s reading of 49.2%. The data was weaker than expected, as consensus forecasts looked for a slight improvement to 49.8.
“U.S. manufacturing activity continued in contraction after growing in March, the first expansion for the sector since September 2022. Demand was soft again, output was stable, and inputs stayed accommodative,” said Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee.
Is the US economy recovering?
In terms of GDP, it posted a 3.3% gain in the fourth quarter of 2023, far exceeding economists' expectations of 2%. That put the US at 2.5% over the course of the year, outpacing all other advanced economies and on track to do so again in 2024.
The US economy started 2024 on a softer note than anticipated as elevated inflation and interest rates continued to weigh on the economy. While we do not forecast a recession in 2024, we do expect consumer spending growth to cool further and for overall GDP growth to slow to under 1% over the Q2 to Q3 2024 period. Thereafter, inflation should gradually normalize to the Fed’s 2-percent target in 2025 as quarterly annualized GDP growth rises toward its potential of near 2%. Interest rates should fall starting in late 2024 but may stabilize at levels exceeding the pre-pandemic average.
US consumer spending held up remarkably well in 2023 despite numerous headwinds. However, this trend has begun to wane. Real consumer spending growth is in retreat and consumer’s expectations about the future suggest a downturn is likely. Gains in real disposable personal income growth are softening, pandemic savings have been exhausted, and household debt is increasing rapidly.
1. Economic growth is likely to decelerate in 2024 as the effects of monetary policy take a broader toll and post-pandemic tailwinds fade.
We expect real GDP growth to walk the line between a slight expansion and contraction for much of next year, also known as a soft landing. After tracking to a better-than-expected 2.8% real GDP growth in 2023, we forecast a below-trend 0.7% pace of expansion in 2024. Among the major components of GDP, consumer spending is likely to rise at a more muted pace next year, while fiscal spending could swing from a positive contributor in 2023 to a modest drag. Notable drops in business investment and housing activity in 2023 set the foundation for improved performance in 2024, even if the outlook remains muted amid higher interest rates; 2023 strength in services sector is likely to soften.
GDP at purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars. Dollar figures for GDP are converted from domestic currencies using single year official exchange rates. For a few countries where the official exchange rate does not reflect the rate effectively applied to actual foreign exchange transactions, an alternative conversion factor is used.
- U.S. gdp for 2022 was $25,439.70B, a 9.11% increase from 2021.
- U.S. gdp for 2021 was $23,315.08B, a 10.71% increase from 2020.
- U.S. gdp for 2020 was $21,060.47B, a 1.5% decline from 2019.
- U.S. gdp for 2019 was $21,380.98B, a 4.13% increase from 2018.
The economic growth outlook for 2024 indicates a probable slowdown, influenced by various factors:
· Impact of Monetary Policy: Central banks worldwide have been enacting stricter monetary policies to address inflation. These actions usually involve raising interest rates, which could temper economic activity by increasing borrowing costs and reducing spending by consumers and businesses.
· Diminishing Post-Pandemic Boost: The economic fillip from reopening after COVID-19 restrictions is waning. The initial surge in consumer spending and business investments following the peak of the pandemic is stabilizing, resulting in a more standard growth trajectory.
· Global Challenges: Ongoing geopolitical tensions, disruptions in the supply chain, and potential energy crises might further impede economic growth. These uncertainties cause businesses to exercise more caution in their investment decisions and can weaken consumer confidence.
· Labor Market Adaptations: As the labor market adapts to the new dynamics post-pandemic, there may be periods of mismatch between job seekers and available positions, affecting overall productivity and growth.
· Inflationary Pressures: Persistent inflation can diminish buying power and raise costs for businesses. If inflation remains high, it might require prolonged restrictive monetary policies, further decelerating economic growth.
In summary, the combination of these factors implies a challenging environment for economic growth in 2024, with many economies likely to witness slower expansion compared to the rapid recovery period post-pandemic.
2. We assume the hiking cycle is over, leaving the Fed Funds on hold at 5.25%-5.5% until the middle of 2024.
If inflation continues its moderating trajectory over the coming quarters, we think it is likely the FOMC will start to slowly normalize policy rates near the midpoint of next year. We forecast 25 bps cuts at each meeting beginning in June, bringing the Fed Funds target range to 4.00%-4.25% at the end of 2024. Concurrently, quantitative tightening, the Fed’s balance sheet runoff program, is expected to be maintained at the same pace through 2024. At $95 billion per month, quantitative tightening is projected to remove approximately $1 trillion from the economy next year.
We understand that the period of hiking interest rates has ended, with the Fed deciding to keep the Fed Funds rate steady at 5.25%-5.5% until the middle 2024. If inflation continues to decrease in the upcoming months, it is probable that the FOMC will slowly begin to adjust policy rates towards the middle of next year. Our prediction suggests a reduction of 25 basis points at each meeting from June, resulting in the Fed Funds target range decreasing to 4.00%-4.25% by the end of 2024. Additionally, we anticipate that quantitative tightening, the process of reducing the Fed's balance sheet, will continue at the same pace until 2024. Removing $95 billion per month through quantitative tightening is expected to withdraw around $1 trillion from the economy in the following year.
3. The U.S. consumer could begin to bend, but not break.
The resilience of the U.S. consumer may show signs of strain without giving way entirely. Expectations point towards a deceleration in consumer spending growth for the upcoming year due to factors such as reduced surplus savings, stagnant wage increases, low savings rates, and a decrease in pent-up demand. Moreover, the resumption of student loan repayments and the rise subprime auto loans and millennial credit card delinquencies suggest that certain consumers are facing financial pressure. However, on a positive note, household financial positions and debt management appear to be in good shape. The robust labor market continues to bolster employment and consequently income levels. In light of these opposing forces, our outlook indicates that consumer spending growth in 2024 may remain positive overall, albeit at a slower pace compared to 2023.
4. The larger-than-expected fiscal boost to the U.S. economy in 2023 could flip to a slight headwind in 2024.
The fiscal deficit roughly doubled to $1.84 trillion—7.4% of GDP—in fiscal 2023 from $950 billion in 2022. While the full extent of this year’s deficit expansion would not be considered stimulus in a classic sense, it is clear the federal government took in a lot less cash than it sent out. Looking to 2024, we expect the federal deficit to narrow to a still very large 5.9% of GDP, reflecting a bit of belt-tightening on the spending side partly offset by higher interest outlays on government debt.
5. Labor markets are starting to look more normal towards the end of 2023; unemployment might go up a bit in 2024, but it will still be low compared to history. The job market's momentum is slowing down with payroll growth slowing, a slight rise in unemployment, lower quit rates, and less need for temporary help. The number of people in the workforce gone up thanks to more people joining and more immigrants coming in. At the same time, the work week is getting shorter, which shows that there's not as much demand for workers. Because it's been tough for businesses to find and keep workers after the pandemic, they might be less likely to let people go when the economy is not doing so well. But even with all that, there might not be as many new hires, and that could push the unemployment rate up to around 4% by the end of next year because of worker turnover. Wages, which have been increasing more slowly, will probably slow down even more with a weaker job market.
6. Inflation trends are cooling, but likely to remain above the Fed’s 2% target through 2024.
9. Pressures on the commercial real estate sector are likely to intensify.
10. Geopolitical risks will remain top of mind.
Elevated trade tensions with China, the ongoing Russia-Ukraine war and conflict in the Middle East all point to continued uncertainties and risks heading into 2024. While direct U.S. economic impact has been limited thus far, the larger risk is for a supply shock of a critical commodity or good—energy, food, semiconductors—that triggers significant market disruption. Next year’s U.S. presidential election could be more impactful than recent cycles on geopolitics given the backdrop of already elevated tensions.
Navigating the Economic Landscape of the USA in 2025
Looking ahead to 2025, the economic landscape of the USA appears as a complex mix of possibilities and obstacles. Although there are opportunities for growth by advancements in technology and strategic policymaking, there are also looming issues that could temper this optimism. Finding the right balance between cautious optimism and practical planning will be key in this environment.
The Federal Reserve's monetary policy adjustments are expected to be a major of economic growth in the upcoming years. As inflation pressures start to ease, there is a chance that interest rates will stabilize or even. This could lead to increased borrowing and investment, which would stimulate economic activity. However, it is essential for the Federal Reserve to carefully manage this balance to prevent a resurgence of inflation while promoting growth. The effectiveness of these policies will play a critical role in shaping the economic path forward.
Controlling inflation and maintaining price stability are crucial priorities. Persistent inflation has weakened purchasing power and strained household budgets, resulting in cautious consumer spending. If inflation can be contained, consumer confidence may rebound, leading to higher spending and investment. Yet, there is a lingering concern that any misstep could result in stagflation, a situation where slow growth coincides with high inflation, creating a challenging economic environment.
The labor market remains a fundamental aspect of economic well-being. As we progress through the decade, changes in workforce dynamics are evident. The growing popularity of remote work, gig economy jobs, and automation is reshaping job landscapes. Industries such as technology, healthcare, and renewable energy are poised for significant growth, but this shift also brings about a need to address skills mismatches through robust education and training programs. Poor management of this transition could lead to increased unemployment, dampening economic prospects.
Fiscal policy and government spending will also play critical roles in the economic outlook. Well-executed infrastructure projects and social programs have the potential to deliver substantial economic stimulus. Investments in sustainable development and reducing income inequality can foster a more resilient and inclusive economy. However, the high levels of national debt remain a concern. Without careful fiscal management, debt servicing could consume a large portion of government revenues, restricting the ability to respond to economic shocks.
The advancements in technology provide a ray of hope for the future. The rapid progress in AI, automation, and renewable energy technologies promises enhanced productivity and fresh economic opportunities. These innovations could position the USA as a global leader in emerging industries, driving economic expansion. However, the fast pace of change also brings about uncertainties. Disruptions in traditional sectors could lead to economic challenges and require significant adjustments from businesses and the workforce.
The global economic landscape will have a significant impact on domestic conditions. Trade relations, geopolitical tensions, and the economic performance of major trade partners will influence the economic prospects of the USA. A stable and cooperative global environment could bolster growth, while increased tensions or economic slowdowns abroad could present substantial risks.
Consumer behavior will also play a crucial role in shaping the future economy. The shift towards digitalization, sustainability, and changing demographics necessitates swift adaptation from businesses. Companies that can meet evolving consumer preferences will thrive, while those that fail to adapt may face difficulties.
In summary, while the economic future of the USA holds promise, it is also marked by uncertainties. How the nation navigates the challenges posed by policy decisions, global dynamics, and technological advancements will be crucial. An approach that combines caution with proactivity, focusing on adaptability and resilience, will be essential in guiding the economy towards a prosperous and stable future.
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