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businessEconomy

Comerica economists see economic growth, rate cuts in second half of 2024

Panelists at Comerica Bank say the risk of a recession is low, with calming inflation and rate cuts expected in the fall.

Economists at Comerica Bank agree that the economy is in a good place, with inflation calming down and expected cuts to interest rates this fall.

Bill Adams, Comerica’s chief economist, said Thursday that the risk of a recession this year is low, and that economic growth is led by affluent consumers. While gas, housing and food are costing more, consumers are still making up for missed experiences that they delayed during the pandemic, like spending on travel, entertainment and restaurants.

Some areas of the economy, however, like multifamily housing, have been disproportionately affected by the Federal Reserve’s high interest rates. Adams described a paradox in which more people may look to rent when housing is expensive, but developers may build less rental units when interest rates are high — creating a rough market for affordable housing.

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The economy will become a growing topic of discussion as the year progresses toward a pivotal presidential election in November, Comerica’s panelists said, after four rollercoaster years of pandemic, supply chain shortages, massive government stimulus packages and stubbornly high inflation.

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Inflation is calming, with rate cuts expected

Prices for goods like new and used cars, which surged in the pandemic, are coming down this year, Adams said. In April 2024, the inflation rate fell to 3.4%, down from 9.1% in June 2022. But on the other hand, inflation in service prices are rising rapidly for products such as homeowner’s insurance, car insurance and home health care.

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“Inflation continues to come down in a two-steps forward, one-step back fashion, and that will probably open the door for the Fed to start cutting industry rates later this year,” Adams said.

Comerica forecasts that the Fed will likely not make a cut to interest rates until September, when Adams predicts a quarter percentage point decrease and possibly another cut in December after the election. The current federal funds rate, the rate of interest that banks charge for lending money, has a target range of 5.25% to 5.50%.

“Directionally, I think it will start to be a little bit less of a restraint on business, borrowing and capital spending,” Adams said.

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John Lynch, Comerica’s chief investment officer, also sees a positive outlook for the economy this year, including a higher demand for utilities to support things like artificial intelligence, data centers and chips.

“You could see as much as $250 or $300 billion in additional liquidity flowing through the economy to consumers, to businesses and to investors over the course of the next three or four months,” Lynch said.

Comerica executives also predict that economic concerns will drive the presidential election’s outcome. Inflation may be the toughest obstacle for Joe Biden, said Dan Donohoe, Comerica’s director of government relations.

“When it comes down to it … it’s really inflation that impacts each and every person on probably a daily basis,” Donohoe said.

To improve outcomes at the polls, Lynch said Biden may focus on the economy leading up to the election.

“Any seated president wants to get reelected,” Lynch said. “So you typically see them prime the pump, whether it’s a combination of monetary or fiscal policies to get the economy and the financial markets going again.”

Tax implications at the polls

A big economic impact from this year’s election will be from taxes. Adams said that going into 2025, several temporary tax measures will expire, from Obamacare subsidies to the individual income tax rate reductions passed by the Trump administration.

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Adams predicts that taxpayers may feel a pinch as temporary cuts expire.

“Probably, we’re going to see some net increase in effective tax rates in the United States,” Adams said. “Which would do a bit to close the deficit, but also is going to be a bit of a headwind economically.”

Overall, economists see a growing economy and a well-balanced job market. But Lynch cautions investors to invest responsibly in diverse markets, and not to get caught up in the “meme stock frenzy.”

“I would just encourage investors … not to sprint on the victory lap. Don’t get too excited,” Lynch said. “I’d encourage new money not to jump in all at once.”

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