Is the US economy hitting a soft patch?

Over the last 18 months, the US economy has proved to be a stunning exception not only to slowing global growth, but to expectations for economic activity at the business end of a tightening cycle. However, softer GDP growth of 1.6% in Q1 2024 (compared to 3.4% in Q4 2023) may have been the first indication that the historically sharp pace at which the Fed has raised rates is beginning to have an effect on activity.

It certainly appears to be having an effect on inflation – April’s CPI read came in at 3.4%, the first release of the year not to exceed analyst estimates. It also marked the first fall in the headline number of 2024, after progress on bringing inflation down stalled in June of last year. While it is not yet the progress that the Fed either wants or needs to see before gaining enough confidence to cut rates, the acceleration in inflation seen in the previous two releases has not continued.

At the same time, we see indications that the restrictive stance of monetary policy is beginning to impact businesses across multiple sectors. These include the ISM indicators for both the Services and Manufacturing sectors, as well as the Philly Fed Manufacturing Business outlook survey.

The sentiment index for the manufacturing sector dipped back below 50 (indicating that respondents see business conditions deteriorating) after trending positive following the Fed’s last hike in July 2023.