IMF lowers outlook for US economy while warning of slower disinflation

The International Monetary Fund (IMF) lowered its 2024 outlook for the U.S. economy by 0.1 percentage points Tuesday for expected annual growth of 2.6 percent.

It held its global outlook steady at 3.2 percent growth for the year while boosting its 2025 expectations to 3.3 percent from 3.2 percent, as predicted in April.

The international lender also kept its 2025 projection for the U.S. economy steady at 1.9 percent, saying it expects employment conditions to weaken next year and for Congress to start making spending cuts.

“Growth is expected to slow to 1.9 percent in 2025 as the labor market cools and consumption moderates, with fiscal policy starting to tighten gradually,” IMF economists wrote in their July update to the world economic outlook.

The Federal Reserve is also expecting relatively weaker employment next year, with the unemployment rate rising to 4.2 percent from its current level of 4.1 percent, according to the Fed’s latest summary of economic projections.

Federal Reserve Chair Jerome Powell told Congress this month that U.S. central bankers are no longer concerned simply about getting inflation under control but that they’re also now paying attention to increased sensitivity in labor conditions, as the ratio of available jobs to job seekers has come way down.

The U.S. consumer price index (CPI) deflated for the first time in June since the pandemic, falling by 0.1 percent from May. The CPI fell to a 3 percent annual increase in June, the first time it has fallen below 3 percent since March 2021.

Despite recent lower trends in prices, the IMF warned of a slowing pace of global disinflation, calling out higher-than-average inflation in services sectors.

“Nominal wage growth remains brisk, above price inflation in some countries, partly reflecting the outcome of wage negotiations earlier this year and short-term inflation expectations that remain above target,” IMF economists wrote.

A spike in profit margins earlier in the pandemic recovery has been replaced by increased employment costs in the beginning of 2024, as compensation along with non-labor costs increased in the first quarter of this year as margins sank. Annual wage growth has outpaced inflation since May of last year, though both have been decreasing.

Increased nominal wage growth, if paired with decreased productivity, could make ir harder for firms to rein in their price increases, especially when profit margins are lower, the IMF noted.

The fund warned about additional price pressures stemming from protectionist economic policies and renewed trade disputes, a potential reference to new China-focused tariffs from the Biden administration along with proposals from the Trump campaign to enact a general tariff should he win the presidential election in November. 

Economists in a different United Nations economic agency, the Conference on Trade and Development (UNCTAD), gave a similar warning this month, calling out the possibility of more restrictive trade policies and a resurgence in domestically focused production agendas.

“The utilization of trade restrictive measures and inward-looking industrial policies are anticipated to negatively impact on the growth of international trade, especially in some strategic sectors,” UNCTAD economists wrote.

Both agencies also warned about the effect elevated interest rates are having on the strength of the dollar, which affects trade dynamics as well an capital flows between countries.

UNCTAD economists sounded a more positive note than the IMF in their July global trade update about fading global inflation and the prospects for U.S. interest rate cuts.

“Moderating global inflation and improving economic growth forecasts suggest a reversal of the downward macroeconomic trends that have characterized most of 2023,” they wrote, adding that rate cuts would depreciate the value of the “dollar, potentially stimulating international trade by increasing both prices and volumes.”