The U.S. is not a risk for a recession, RBC says

RBC chief economist Frances Donald says the U.S. consumer has remained resilient, but persistent inflation has weakened household buffers and may be starting to limit business pricing power.

In RBC’s June 24 monthly executive briefing, Donald said investors should still be careful about betting against the U.S. economy, given that consumers account for nearly two-thirds of GDP. But she said the combination of higher energy costs and sticky non-energy inflation has left consumers less able to absorb another price shock.

“That’s not enough to break our cautiously optimistic U.S. narrative,” Donald said. “The K-shape and ultra-resilient high-income consumer is still in play, so too is a tight labour market that will keep Americans employed.”

Still, she said businesses may be finding it harder to pass price increases through to consumers for the first time since the pandemic.

The economist said falling energy prices remove an important headwind, but headline inflation is likely to remain unattractive for several more months. At around US$75 per barrel for West Texas Intermediate oil, RBC expects energy to keep putting upward pressure on year-over-year headline inflation until February 2027.

Non-energy inflation also remains persistent. Donald pointed to goods inflation tied to tariffs, continued pressure from housing, and super core inflation, or core services excluding shelter, running at 3.5% year-over-year.

Donald said consumer stress is building, particularly for low- and middle-income Americans. Real wages have turned negative, the personal savings rate fell to 2.6% in April, and revolving credit in Q2 was running 3.8% above a year earlier.

Even so, she said it remains too early to bet against the U.S. economy. Corporate profit margins remain elevated, the labour market is still tight and high-income households continue to support aggregate spending.

“Taken together, the US economy is not currently facing recession risk and our aggregate expectation for US growth is still comfortable in the 2% range for this year,” Donald said.

RBC expects U.S. growth to remain near a 2% trend, supported by AI infrastructure investment, government spending and wealthy households. But Donald said the underlying economy is becoming more uneven, with low- and middle-income consumers more vulnerable to further shocks.

On inflation, RBC expects core inflation to settle just below 3% by year-end, with housing, wages and tariff passthrough continuing to keep pressure in the system.

Donald said the labour market should remain tight because of both structural and cyclical factors, though young workers and white-collar sectors continue to face pressure.

“After six years of consumer resilience, the group is at greater risk from additional shocks and the pricing power baton is passing,” Donald said. “How businesses choose to carry it will define the next chapter of the economic cycle.”

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