scenario
Baseline (60%): Real GDP growth exceeds expectations in the second quarter of 2024 after slowing in the first quarter. The contrasting outcome was caused by a large drawdown in inventories in the first quarter, followed by restocking in the second quarter. On average, GDP grew at a fairly high pace of 2.2% through the first half of the year. We expect GDP to continue growing at a similar pace through the remainder of the year, but to slow in 2025.
Overall, the picture for the U.S. economy remains bright. Personal consumption is expected to hold up stronger than expected, projected to grow 2.4% in 2024, slightly higher than last year’s 2.2% increase. Business investment is projected to grow 4.2% this year, down slightly from 4.5% in 2023. The Inflation Control and Creating Beneficial Incentives for Semiconductor Manufacturing Act (CHIPS Act) and Science Act are projected to continue to drive a strong increase in investment in structures and machinery and equipment, and companies continue to invest heavily in intellectual property such as software and artificial intelligence. On the trade side, export growth is expected to slow to 2.2% in 2024 before rising again the following year, while imports are projected to grow 3.8% this year. Government spending is projected to grow 2.9% in 2024.
Consumer Price Index (CPI) inflation finally fell below 3.0% in July and is expected to continue to decline, reaching 2.7% by the fourth quarter. Employment growth is expected to continue to slow, and labor force participation is expected to continue to decline due to demographic changes. The unemployment rate has risen to its highest level since October 2021. With inflation falling and unemployment rising, the Federal Reserve is expected to begin cutting interest rates in September. It expects its target rate to fall by 100 basis points this year and another 100 basis points in 2025.
Overall, real GDP is expected to grow by 2.7% in 2024 and 1.5% in 2025. Between 2026 and 2028, real GDP growth is projected to hover between 1.7% and 2.1% per year.
Persistent Inflation and Geopolitical Conflict (20%): While our baseline remains positive, downside risks always exist in any forecast. We believe these risks center around two interrelated issues: 1) geopolitical conflict and 2) trade policy. The combination of these issues could lead to persistent inflation.
The conflicts in Ukraine and the Middle East are at a dangerous stage and are likely to escalate. As both conflicts are taking place in major oil-producing regions, an escalation could result in higher oil prices. In this scenario, oil prices rise and remain around $10 above the baseline through 2025.
Geopolitical conflicts are not fought with weapons alone. Trade policy has increasingly become a competitive battleground. The US presidential election is in full swing, with candidates from both major parties voicing support for imposing certain tariffs on foreign imports. While the exact impact depends on the design and implementation of the tariffs, these policies will likely affect the prices faced by US businesses and consumers. Therefore, in this scenario, we model tariffs that raise the cost of imported intermediate inputs by 1%, and increase the cost of imported final products by another 1%.
As a result of the tariffs and oil price shock, CPI inflation remains above 3% through the third quarter of 2025. While this scenario sees the September rate cuts continue as in the baseline scenario, rising inflationary pressures in the second half of 2024 and 2025 prevent the Fed from cutting rates further through the end of 2025.
In this scenario, GDP growth is lower compared to the baseline scenario, especially over the next two years: growth is 2.6% in 2024, but the following year, when tariffs are fully implemented, growth is just 1.0% in 2025. Growth then averages 2.0% per year from 2026 to 2028.
Golden Age of the Labor Market (20%): Over the past few years, companies have invested heavily in software and technology. Some of these investments, such as investments in AI, have the potential to transform certain types of jobs. In this scenario, which is based on an optimistic view of the adoption and usefulness of new technologies, productivity is expected to grow at an average annual rate of 1.8% from 2024 to 2028, compared to a baseline of 1.5%.
In addition to the productivity dividend, this scenario also sees higher population growth, projecting total population to be 1.1 million people higher than in the Baseline scenario by the end of the projection period. In addition to population growth, we also project higher labor force participation rates as workers continue to postpone retirement. These dynamics combine to increase the labor supply to the economy. More workers translate into higher production and spending, which lifts the overall economy, creating a virtuous cycle.
In this scenario, GDP grows at a faster pace than the baseline forecast over the entire projection period. From 2024 to 2028, GDP grows by an average of 2.5% per year, 0.5 percentage points higher than the baseline forecast. In this scenario, the economy’s long-term potential growth rate also rises to 2.8% from 2.2% in the baseline. In that sense, this scenario shows what would be needed to make recent economic growth rates sustainable in the long term.
