Global economic forces
Tailwinds
- Likely Federal Reserve (Fed) pivot to more accommodative monetary policy later in 2024
- Still-ample U.S. and global liquidity conditions
- Bank credit standards tight, but easing
- Productivity-enhancing investment, including artificial intelligence (AI), supports growth potential
- Still sizable cash balances among upper-income groups1
- Global manufacturing green shoots, commodity super-cycle underpins commodity prices, producers’ exports, and emerging market finances2
- Global trade beginning to stir with a gradual recovery in manufacturing
- Secular strength in electric grid, data center, AI-related investment
Headwinds
- Slowing real (inflation-adjusted) income growth due to firmer inflation, moderating job gains
- Lagged impact of past central-bank rate hikes and rising real rates until policy pivots occur
- An approaching end to post-pandemic supports to disinflation, employment, and pent-up demand
- “Sticky” wage and service price inflation
- Higher rental inflation, sticky food and energy inflation from tight supply, geopolitical strain
- Worsening financial strain among lower- and middle-income households
- Tight supply, elevated home prices and mortgage rates hamper housing recovery
- Deteriorating supply chains tied to geopolitical disruptions, weather, market imbalances
- Deflationary effect of dollar strength on the global economy
Source: Wells Fargo Investment Institute, as of June 30, 2024. Subject to change.
1. Federal Reserve Board, Financial Accounts of the U.S., as of June 7, 2024.
2. If you look at commodity prices over the very long term (hundreds of years), it becomes evident that they tend to move in overall bull and bear cycles, some lasting decades. These are super-cycles.
Key Takeaways
- The U.S. economy has lost some momentum through this year’s first half amid moderating jobs and real income growth supporting consumer spending. Still, we believe unusually accommodative financial conditions this late in the economic cycle will cushion the gradual economic slowdown we anticipate in the coming months.
- The most visible risk in our outlook is a sudden reversal of easier financial conditions, leaving leveraged sectors of the global economy and elevated asset values exposed to an abrupt pullback.