U.S. Economy Faces 0.3% GDP Growth, 2.9% Inflation in 2024

The U.S. economy is grappling with a dual challenge as the Trump administration's tariff policies and policy uncertainty are pushing it towards a stagflation scenario. A survey of 14 economists reveals that the first quarter GDP growth is projected to be a mere 0.3%, a significant slowdown from the 2.3% growth in the fourth quarter of 2024. This deceleration is the weakest since the recovery from the pandemic in 2022.

Meanwhile, the core PCE inflation index, favored by the Federal Reserve, is expected to remain elevated at 2.9% for most of the year, only dropping in the fourth quarter. The dim GDP outlook is reflected in the declining confidence of consumers and businesses, which is now manifesting in actual economic activity. The U.S. Department of Commerce reported that real consumer spending, adjusted for inflation, increased by only 0.1% in February, following a 0.6% contraction in the previous month. Action Economics has revised its forecast for this quarter's spending growth from 4% to 0.2%.

Barclays noted in a weekend report that "as early confidence indicators worsen, evidence of slowing real economic activity is becoming more conclusive." Another factor is the surge in imports ahead of the tariffs, which temporarily boosts GDP statistics. However, the impact of these imports is expected to wane. Among the 12 economists surveyed, only two predict a contraction in the first quarter, and none foresee a consecutive decline. The lowest prediction, from the Oxford Economics Research Institute, is -1.6% for the first quarter, with a rebound to 1.9% in the second quarter as these imports eventually translate into growth through inventory or sales channels.

Economists generally predict a gradual recovery: 1.4% GDP growth in the second quarter, 1.6% in the third, and 2% in the fourth. However, the fragile 0.3% growth in the first quarter makes a slide into negative territory a real risk. With new tariffs taking effect this week, not everyone is confident in a swift rebound. Moody's Analytics Chief Economist Mark Zandi warns that while the baseline forecast does not show a GDP contraction, the escalating global trade war and the Department of Government Efficiency's cost-cutting measures could lead to negative growth in the first and second quarters. If the president does not reverse the tariffs by the third quarter, a recession may be unavoidable.

Moody's predicts a 0.4% growth rate for the first quarter, rising to 1.6% by the end of the year, still below the trend rate. Persistent inflation complicates the Federal Reserve's ability to address slowing growth. The core PCE is expected to rise to 3% in the next quarter and remain around that level until it drops to 2.6% a year later. While markets anticipate a rate cut by the Federal Reserve, it may struggle to justify one unless inflation shows a clear decline by the end of the year.

The automotive industry is particularly affected, with the three major U.S. automakers urgently lobbying the White House for exemptions on car parts tariffs ahead of the new tariffs' implementation. The combination of slowing economic growth and persistent inflation creates a classic stagflation scenario, posing a significant challenge for policymakers. Traditional monetary policy tools may not be effective in addressing both issues simultaneously, leaving the Federal Reserve in a difficult position. Lowering interest rates to stimulate growth could exacerbate inflation, while raising rates to control inflation could further slow down the economy.

Businesses across various sectors are feeling the impact, expressing concerns about the tariffs' effects on their operations. The uncertainty surrounding trade policies is making it difficult for companies to plan for the future, leading to a cautious approach to investment and hiring. This cautiousness is contributing to the overall economic slowdown. The U.S. economy is already facing other challenges, including a tight labor market and rising input costs, which are adding to the pressure on businesses. The combination of these factors is creating a challenging environment, with stagflation becoming an increasingly likely outcome.