Broad economic data shows that the US economy slowed significantly in the first half of this year, which is closely related to the Federal Reserve's long-term policy of maintaining higher interest rates (i.e. higher for longer) to raise borrowing costs comprehensively and the sustained inflationary impact on the US. Revised economic data released on Thursday shows that personal consumption expenditure, the core engine of the US economy, fell 0.5 percentage points compared to the initial value after adjustments, and the final value converted to the annualized quarterly rate was only 1.5%. Other data shows that every corner of the US economy is confirming a slowdown in economic growth, such as declining orders and shipments of certain commercial equipment, the largest trade deficit in two years, signs of weakness in the job market, and overall declines in home purchases.

After the Fed began its aggressive interest rate cycle to curb soaring inflation in 2022, the U.S. economy has been able to withstand dire warnings of an economic recession in 2022-2023, thanks in part to tight labor markets and high overall wage levels, which together have boosted U.S. consumer spending. Consumption, the 'core driving force' of the U.S. economy, accounts for 70-80% of U.S. GDP, all of which are taken into account in the various consumption projects. However, the latest revised economic data shows that, in the first quarter, the U.S. labor market showed clear cracks, while consumption slowed significantly.

Bill Adams, chief economist at Comerica Bank, wrote in a report, 'The U.S. economy is expected to be in a low-speed state in the first half of 2024, after a growth rate above the trend line in the second half of 2023.' 'The final value of GDP for the first quarter was lackluster, and retail sales and real estate activities in the second quarter are expected to remain weak.'

The Atlanta Fed's GDP Now economic model is currently predicting a 2.7% annualized quarterly rate for second-quarter U.S. GDP growth, down from the previously predicted 3% before Thursday's revised data release.

All of these data highlight how the Fed's policy of maintaining benchmark interest rates at their highest level in 20 years to cool off hot demand in everything from consumer goods to home buying to commercial equipment by raising various borrowing costs has helped lower U.S. inflation and encourage it to return to its 2% target. Fed officials hope that the slowdown in economic activity will further suppress the inflation rate, which currently remains around 3%, still a distance from the Fed's anchored 2% target.

Another report released on Thursday shows that with the heavy burden of the Fed's long-term high interest rate policy, mortgage rates, which surged to around 7%, have an increasingly fierce negative impact on the real estate market. The National Association of Realtors(NAR) reported a record low in the number of existing home contract signings for May, unexpectedly falling to the lowest level since 2001.

Cracks in the U.S. labor market are becoming more pronounced.

Despite expectations that monthly data released on Friday will show a moderate rebound in personal spending in May, signs of financial tightening suggest that U.S. economic growth will continue to slow in the coming months. Revised data released on Thursday showed that after adjusting for inflation, U.S. first-quarter post-tax personal income grew by just 1.5% year-on-year, the smallest annualized quarterly rate increase since 2022.

In addition, the tenacity of the U.S. labor force, which is the main source of income growth for U.S. consumers, is also slowing down. Data released on Thursday showed that the number of continuing claims for unemployment benefits in the United States has risen to its highest level since 2021, one of the indicators of the number of people receiving unemployment benefits. This suggests that unemployed Americans will need more time to find another job, meaning that the income level that supports consumption is starting to cool, and naturally pushing U.S. consumption spending downwards.

U.S. businesses are also feeling pressure on rising borrowing costs. Data released on Thursday showed the largest drop in core capital goods orders in May this year. Core capital goods orders generally refer to the scale of equipment investment, excluding aircraft and military hardware.

Monthly core capital goods shipments fell by 0.5%, the largest three-month decline. Core capital goods shipments are an important data used in the government's GDP report to help calculate equipment investment.

U.S. domestic producers also face the challenge of a strengthening U.S. dollar, which could curb U.S. export demand. Since the latest dot plot shows the Fed will maintain higher interest rates for longer, the U.S. dollar index, which measures the strength of the dollar against major currencies, has risen rapidly since the June Fed rate decision.

The U.S. government's Leading Economic Indicators report shows that due to a significant decline in exports, the U.S. goods trade deficit expanded to $100.6 billion in May, the highest in two years. Meanwhile, the report also showed that wholesale and retail inventories increased, which may help weaken the expanding impact of the trade deficit on second-quarter U.S. GDP.

How much longer can the US Federal Reserve's high interest rate policy hold up? The market is beginning to doubt the hawks' expectations of the dot plot.

In the latest official economic forecast data released after the US Federal Reserve's interest rate decision, officials downgraded expectations of three rate cuts this year to just one, maintaining a long-term bias towards a high-interest-rate monetary policy and raising inflation expectations. However, against the backdrop of a comprehensive slowdown in economic growth, the Fed is getting closer and closer to the first rate cut, and the magnitude of the rate cut may be greater than that presented by the dot plot.

As the most anticipated part of the statement document released after the US Fed rate decision, the midpoint of the rate dot matrix currently shows that most Fed officials expect to cut rates only once in 2024, compared with three times forecast in the March dot plot. A total of 50 basis points were cut. And this time, as many as four Fed officials supported no rate cuts this year, with the 10 points in support of three rate cuts in March disappearing entirely.

In addition, with expectations of a sharp decline in interest rate cuts this year, Fed officials have simultaneously raised the path of policy interest rates for 2025, raising the median expected interest rate at the end of 2025 from 3.9% to 4.1%, while raising the median expected long-term policy interest rate from 2.6% to 2.8%. This also means that most Fed officials are increasingly recognizing the reality of the rising neutral interest rate. Officials also raised the 2024 core PCE inflation forecast, which excludes food and energy, from 2.6% to 2.8%, suggesting that inflation rates may not advance much from current levels this year.

However, with significant cracks appearing in the US labor market, and data measuring US business and consumer spending both showing significant cooling, some analysts believe that the hawkish dot plot may be difficult to achieve and that the likelihood of two or even more rate cuts this year is very high.

Despite the latest release of the US Federal Reserve's "dot plot," which shows officials' median forecast for only one rate cut this year, Goldman Sachs economists still believe that the Fed will cut rates twice this year and argue that the US labor market is at a turning point. Jan Hatzius and other Goldman Sachs economists wrote in a report to clients that the intensity of labor demand is clearly cooling, although non-farm employment is healthy, with both initial claims for unemployment benefits and the number of people on continuous unemployment rising in recent weeks. Hatzius and other economists wrote that the main driver of labor demand is economic activity, and GDP growth has slowed significantly, so we are confident in our forecast that the Fed will cut rates twice in September and December.

Although the latest release of the US Federal Reserve's interest rate "dot plot" shows officials' median forecast for only one rate cut this year, if the core CPI and core PCE index continue to rise or even decline at an extremely low rate, the Fed may continue to push for two rate cuts this year and increase the likelihood of the first rate cut in September.

"There is still a possibility of two rate cuts this year, which are expected to start as early as September, but Fed officials need data to comply with and strengthen their confidence in rate cuts," said Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Co. "Conservatism is understandable. They are inclined to conservatism, and I think the door is still open."

Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a report to clients: "Our comparison of PPI and CPI data shows that the core PCE deflator in May increased by only 0.11%, well below the average month-on-month increase of 0.32% for the first four months of the year." "Our forecast shows that inflation will experience a significant downward surprise."

"The prospect of slowing rental increases, declining wage inflation and squeezing retail profit margins implies that core PCE will continue to rise at a rate below the Fed's expectations, laying a solid foundation for the first rate cut in September and at least two rate cuts this year," said Pantheon Macroeconomics chief economist Shepherdson.

Edited by Jeffrey