Labor Market

Households have ramped up their cash holdings since the end of 2019, but the absence of an empirical link between cash and consumption leads us to believe that we’ve modestly overestimated the risk of consumer-driven overheating.

Easier financial conditions, rising home prices, rebounding consumer sentiment, and a stabilization in manufacturing activity all augur well for near-term US growth prospects. An unsustainably low savings rate is a key risk to the US economic outlook. Our revised forecast is centered on a recession starting in late 2024 or early 2025.

The disinflation to date has been benign because it has come almost entirely from improving supply. But the supply-side tailwind has exhausted, so the last mile of the journey to 2 percent inflation will be the hardest, especially in the US and the UK. We discuss the investment implications. Plus, we highlight an interesting sector pair-trade.