OECD Economic Outlook, Volume 2023 Issue 1

United States

Real GDP is projected to grow by 1.6% in 2023 and 1.0% in 2024. Growth in private consumption and investment is expected to moderate in response to the tightening in monetary and financial conditions and as savings are further depleted. As demand slows, employment is expected to fall and the unemployment rate is projected to gradually rise towards 4½ per cent in 2024. With labour market tightness abating, wage growth is expected to moderate further, along with inflationary pressures. Nonetheless, the economic outlook could worsen if rising interest rates expose further financial fragilities. On the upside, faster-than-anticipated disinflation could allow an earlier easing of monetary policy that supports economic growth.

The lagged impact of monetary policy tightening along with a further increase in the federal funds rate will weigh on economic growth. Temporary fiscal support introduced during the pandemic has now unwound and the stock of household savings accumulated through the pandemic is being rapidly drawn down. Labour force participation of women would benefit from improving access to childcare through increased public funding. At the same time, the quality of childcare could be improved by establishing minimum federal standards for care provision and a quality rating system for childcare centres that is harmonised across states.

Economic activity continues to slow

Real GDP growth eased in the first quarter of 2023, growing at an annual rate of 1.3% compared with 2.6% in Q4 2022. Housing investment further declined, partly reflecting the tightening in financial conditions. There have been continued robust aggregate employment gains, but this has been less apparent in interest-rate sensitive sectors such as construction and manufacturing. Nominal wage growth has moderated somewhat, but remains high by historical standards. Although growth in the personal consumption expenditures price index fell to 4.4% in year-on-year terms in April 2023, from its peak of 7% in mid‑2022, inflationary pressures in the services sector remain elevated.

United States: Investment and inflation indicators

1. Personal consumption expenditures price index.

2. Personal consumption expenditures price index excluding food and energy.

3. The Trimmed Mean PCE inflation rate is published by the Federal Reserve Bank of Dallas and is an alternative measure of core inflation in the price index for personal consumption expenditures (PCE).

Source: U.S. Bureau of Economic Analysis (BEA); and Federal Reserve Bank of Dallas.

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United States: Demand, output and prices

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United States: Activity and monetary indicators

Source: OECD Economic Outlook 113 database.

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Recent external developments have been largely supportive of economic growth. Bilateral exports to China have picked up in recent months, consistent with rebounding Chinese activity following the relaxation of pandemic-related restrictions. In addition, more stable global energy prices are dampening inflation in the United States. Domestic gasoline prices rose sharply through the first half of 2022 but have now declined to around the level observed immediately prior to the onset of Russia’s war of aggression against Ukraine.

Monetary and fiscal policy are no longer stimulating the economy

The Federal Open Market Committee has continued tightening monetary policy in response to the ongoing inflationary pressures. The federal funds rate has been lifted to the 5- 5¼ per cent range and central bank holdings of Treasury securities, agency debt and agency mortgage-backed securities continue to be reduced. The collapse of several regional banks in March prompted the Federal Reserve to introduce a new facility to provide short-term liquidity support to financial institutions. Nonetheless, surveys subsequently noted a tightening in bank lending standards amid increased uncertainty and concerns about liquidity. The OECD projections assume that the federal funds rate is raised by a further 25 basis points in the coming months. The policy rate is assumed to remain at that level until the second half of 2024, at which point it starts to ease.

The projections assume a cumulative fiscal consolidation of around 1 per cent of GDP over 2023‑24. Temporary fiscal support introduced during the pandemic has now been unwound. Nonetheless, some fiscal transfers from federal to state and local governments are yet to be fully spent. The household saving rate has declined sharply since 2021 and much of the remaining excess savings pool accumulated during the pandemic is held by higher income households with lower marginal propensity to consume. The ongoing implementation of projects related to the Infrastructure Investment and Jobs Act will push public investment as a share of GDP slightly higher in the coming years. The aggregate impact on demand of the Inflation Reduction Act provisions will be limited in the period to 2024, with expenditure on a range of climate and energy initiatives and extensions to health care subsidies estimated to be offset by the introduction of a minimum corporate tax. The federal government reached the debt limit of US$31.4 trillion in January and the Treasury subsequently enacted “extraordinary measures” to meet financial obligations. A recent agreement to suspend the debt limit until 2025 and cap discretionary spending over the next two years is expected to reduce government outlays by 0.2% of GDP in 2024.

Economic growth will weaken

Real GDP is projected to grow by 1.6% in 2023 and 1.0% in 2024. Following a period of very strong nominal growth, spending on private consumption and investment is expected to moderate in response to the tightening of monetary and financial conditions and as excess savings are further depleted. Employment is anticipated to fall and the unemployment rate to gradually rise towards 4½ per cent in 2024. With labour market tightness abating, wage growth is expected to moderate, prompting a gradual decline in services inflation. Nonetheless, core inflation is not projected to return to around the Federal Reserve 2% target before late 2024.

There are both downside and upside risks to the projections. Rising interest rates will further impact debt-interest costs of households and businesses and this may exacerbate existing fragilities in the financial sector. On the upside, inflation could moderate more quickly if weaker labour demand results in a faster-than-anticipated decline in wage growth, allowing an earlier easing of monetary policy by the Federal Reserve.

Improving childcare access would promote gender equity

Further reducing the fiscal deficit would improve the sustainability of public finances and help curtail inflationary pressures. Revenue-raising options include phasing out regressive deductions from the tax code, such as the mortgage interest tax deduction and state and local tax deductions, and increasing the taxation of capital gains on inherited assets. The climate transition remains a key priority and further regulatory changes, green investment, structural reforms and carbon pricing will be required over the years ahead. In addition, promoting female participation in the labour market should be a priority given the large gap in participation rates between men and women. This partly reflects low affordability and availability of childcare. A fundamental issue is a lack of funding that means most families eligible for childcare support do not currently receive it. In addition, the quality of available care could be better ensured by establishing minimum federal standards for care provision and a quality rating system for childcare centres that is harmonised across states.