IMF says strains are beginning to emerge in US economy

Fund says government shutdown delayed annual consultations

Traders work on the floor of the New York Stock Exchange. AFP

The International Monetary Fund has said strains on the US economy are “starting to mount” as the nation comes out of its longest government shutdown.

The fund in October projected US fourth-quarter growth at 1.9 per cent. IMF spokeswoman Julie Kozack said it would probably be revised lower, but that the effect was likely to be reversed in the first quarter of next year.

“Domestic demand has been moderating and job growth is slowing. The combination of slowing immigration inflows, tariffs, broader policy uncertainty have been weighing on activity,” Ms Kozack said on Thursday.

She said the fund did not anticipate the shutdown to have any major spillovers into the global economy. At 43 days, the most recent shutdown was the longest in US history.

Ms Kozack said the lack of government data since October 1 also "complicated our ability to assess the state of the US economy" and began its preliminary work for its annual Article IV consultation – the fund's annual economic check-in with the US.

She added that scheduled Article IV discussions were delayed because of the shutdown and that no new date had been set, although the fund would be discussing a new timeline now that the shutdown has been lifted.

White House officials anticipate the nation's gross domestic product growth to be between 1.5 and 2 percentage points lower this quarter because of the shutdown, although the economy could bounce back in the next quarter. White House economic adviser Kevin Hassett said earlier on Thursday that the government would release a closely monitored jobs report for October, but it would not include the jobless rate.

"We probably – will never actually know for sure what the unemployment rate was in October," he told Fox News.

White House economic adviser Kevin Hassett. Bloomberg

The prospect of another US interest rate cut next month is growing more contentious. The Federal Reserve reduced interest rates by 25 basis points at his most recent meeting to support a weakening labour market, but policymakers have expressed caution about reducing rates further due to the lack of government data.

"Formulating an economic outlook is challenging – and the limited data compounds the difficulty," Boston Fed president Susan Collins, a voting member on the rate-setting Federal Open Market Committee, said on Wednesday.

Those comments underscore the caution being sounded by the Fed's hawkish contingent who see greater risks to inflation than employment. Unlike other central banks, the Fed has a dual mandate of price stability and maximum employment. A Consumer Price Index report from September showed that inflation rose at a 3 per cent annualised rate, less than forecast but still above the Fed's 2 per cent target. Thursday's CPI report for October was shelved because of the shutdown.

Non-voting members on the committee, including Atlanta Fed president Raphael Bostic and Cleveland Fed president Beth Hammack, have also indicated that they prefer to hold rates at the current range of 3.75 to 4 per cent.

Fed governor Stephen Miran, currently on leave from his position at the White House while he fills the role in a temporary capacity, has backed aggressive rate cuts, establishing himself as an outlier among the committee. Fed governors Christopher Waller and Michelle Bowman, both on US President Donald Trump's shortlist to succeed Jerome Powell as head of the Fed next year, have argued for cautiously reducing rates.

The abrupt change in rate-cut expectations was partly responsible for a Wall Street sell-off, with the Dow Jones Industrial Average closing 797 points – or 1.65 per cent – lower on the day. The S&P 500 and Nasdaq Composite fell 1.66 and 2.29 per cent, respectively.

Also contributing to Thursday's decline was a technology sell-off after concerns about valuations of companies critical to artificial intelligence. Nvidia shares fell 3.58 per cent to $186.86 a share, while Google parent Alphabet and Microsoft declined 2.89 per cent and 1.54 per cent to $279.12 and $503.29 a share, respectively. Apple finished the day marginally lower at $272.95 a share, a decline of 0.19 per cent.

"I'm noticing more narratives creeping in on how much is going to be spent, are we going to see results, how much energy it's going to cost," said Peter Andersen, founder of Andersen Capital Management.

A private sector report released last week from Challenger, Gray and Christmas showed employers in the US announced more than 153,000 job cuts last month. The company noted at the time that the cuts were correcting course after the post-pandemic hiring boom, but noted it also comes amid AI adoption.

"You see a significant number of companies either announcing that they are not going to be doing much hiring or actually doing layoffs, and much of the time they’re talking about AI and what it can do. So we’re watching that very carefully," Mr Powell said after the central bank's two-day policy meeting last month.

Verizon is expected to join the major firms announcing large layoffs. US media reported the telecommunications company is planning to cut up to 15,000 jobs as its new chief executive takes charge.