US Growth Slows Amid High Inflation and Policy Challenges, Says Morgan Stanley

Morgan Stanley's report predicts a slowdown in the US economy's growth due to tighter immigration, rising tariffs, and reduced consumer spending. US GDP growth is expected to decline from 2.4% in 2024 to 1.3% by 2026, with persistent inflation and a cooling labor market presenting additional challenges.

The US economy is facing the prospect of slower growth and sustained high inflation, as outlined in a new report by Morgan Stanley. The investment firm's revised projections signal a downward trajectory for GDP, primarily influenced by a cooling labor market, tougher immigration policies, and rising tariffs.

Morgan Stanley forecasts that GDP growth will reach 2.4% in 2024, but will slow to 1.9% in 2025 and further to 1.3% by 2026. This decline is attributed to a reduction in consumer spending and decreased business investment, both crucial components of economic expansion.

The report also highlights that core consumer spending, a major economic driver, will diminish significantly in the years ahead. This is attributed to slowing labor income growth, which affects spending power. Moreover, the imposition of higher tariffs is expected to deter economic activity and exert upward pressure on prices, exacerbating inflationary concerns.

The labor market is not spared from challenges, with payroll growth predicted to hover just above 100,000 jobs monthly in 2025. Unemployment rates are expected to end 2024 at 4.3%, decrease to 4.1% in 2025, but rise to 4.5% by 2026. Tighter immigration constraints are cited as a contributing factor to limited job growth.

Fiscal policies offer little immediate relief, as significant provisions of the Tax Cuts and Jobs Act are set to expire by 2025's end. Although some measures, such as reinstating SALT deductions, are anticipated in 2026, their impact is predicted to be minimal. The report paints a challenging economic scenario characterized by slower growth, persistent inflation, and a restrictive labor market.

(With inputs from agencies.)