Pace of investments in US manufacturing now to slow down: S&P Global

S&P Global thinks the US government initiatives put in place in the last 18 months are working through the economy and partially offsetting the impact of the Federal Reserve’s (Fed) tightening.  

Further increases stemming from the CHIPS and Science Act (CHIPS) and the Inflation Reduction Act (IRA), together with infrastructure investment ramp up from the Infrastructure Investment and Jobs Act (IIJA), may provide material buffer against anticipated weakness in private consumption and the typical cyclical slowdown, S&P Global said in a release.

It is possible that multiplier effect of current fiscal stimulus may be smaller, given where the country is in the economic cycle—they are coming through at a time when the economy appears to have closed the output gap and is at full employment.

Once cyclically adjusted, the multiplier effect, though still positive, is likely to be lower at this stage. The government initiatives may potentially have a knock-on effect of keeping average wages elevated (due to labour shortage) and the overall economy above estimates of trend growth, it noted.

As a result, inflation outlook could be persistently above target, leading the Fed to raise rates even more and thus crowding out other private-sector investment, it said.

On the other hand, once past the short-run cyclical effects, the fiscal initiatives could generate higher productivity in the economy, lifting longer-term growth potential.

For now, S&P Global thinks the effects of these initiatives have limited the speed and trough of a typical slowdown cycle.

ALCHEMPro News Desk (DS)