Dive Brief:
- U.S. economic growth will slow from about 2% this year to 1.8% in 2027 as an inflationary energy shock from the Iran war saps consumer spending, according to a forecast Tuesday by the Organization for Economic Cooperation and Development.
- “Higher energy prices will drive a sharp but temporary rise in inflation,” the OECD said, while noting that an increase in the Federal Reserve’s main interest rate “may be warranted.”
- “Risks are tilted to the downside: a sustained increase in oil prices would weigh further on economic activity, while elevated equity valuations and vulnerabilities in private credit markets pose additional risks,” the OECD said in a report on the global economy.
Dive Insight:
The OECD’s forecast of sustained GDP growth this year aligns with a Fed report that U.S. economic activity among 10 of its 12 regional banks rose last month “at a slight to moderate pace.”
Lower-income households face stiffer challenges from inflation than their wealthier counterparts, the central bank said Wednesday in its survey, commonly known as the Beige Book, based on economic reports from its district banks.
“Consumer spending remained mixed across districts and increasingly bifurcated across income groups amid affordability pressures,” the Fed said, summarizing reports provided by its district banks through May 27.
“Higher-income households remained resilient and less sensitive to price increase, while middle-income households were described as ‘squeezing more life out of every dollar before deciding to spend it,’ and low-income consumers showed greater financial strain,” the central bank said.
Consumers have stepped up purchases of necessities and their use of credit cards while cutting back on buying retail goods, the Fed said.
Also, auto dealers reported softer demand for new vehicles, noting a focus among consumers on affordability and fuel costs and a preference for used and hybrid vehicles, the central bank said.
War-induced price pressures rose across most Fed regions, especially in groceries, shipping, packaging and fertilizer, the Fed said.
“Non-labor input costs continued to rise faster than selling prices, contributing to broader concerns about margin compression,” the central bank said.
“Several regions highlighted inflation mitigation strategies of firms that ranged from supply-chain optimization, product adjustments, reduced offerings and temporarily absorbing higher costs to preserve customer demand,” the Fed said.
In a bright spot, manufacturing rose “at a modest to strong pace” in nine regions, with only one regional bank reporting a decline, according to the Fed.
Manufacturing activity sped up last month to the fastest pace in four years, buoyed by gains in new orders and production and an improvement in employment, the Institute for Supply Management said Monday.
The ISM’s manufacturing index increased 1.3 points to 54, or four points above the 50-point threshold indicating growth, the ISM said. New orders rose to the highest level in four months.
A surge of investment into artificial intelligence helps fuel steady U.S. growth, according to the OECD.
“While the energy shock and heightened uncertainty stemming from the evolving conflict in the Middle East are expected to sap household consumption growth, underlying growth remains supported by strong AI-related investment,” the OECD said.
The OECD cautioned that its economic forecast may prove too optimistic, noting that “a sustained increase in oil and gas prices stemming from the evolving conflict in the Middle East would weigh more heavily on activity than currently assumed.”
The OECD also flagged risks to the U.S. economy from the federal budget deficit and mounting national debt.
“The budget deficit remains historically large, at over 7% of GDP, and will continue to grow,” the OECD said. “Sustained fiscal consolidation will be needed to contain demand pressures and place the debt ratio on a stable path.”
