Economists are predicting decreasing recession risks and moderating inflation in 2024, signaling positive news for the U.S. economy. A report by the American Bankers Association’s Economic Advisory Committee (ECA), which includes contributions from sixteen chief economists from major financial institutions, highlights the diminishing recession odds and solid labor market conditions. While recession risks remain around 30 percent due to policy and geopolitical risks, recent surveys have shown a sharp drop in recession expectations, with many banks predicting modest growth prospects.
The ECA economists project real economic growth at 1.7 percent in 2024 and 1.8 percent in 2025. On the inflation front, they expect inflation to gradually advance toward the Federal Reserve’s 2 percent target. The Personal Consumption Expenditures (PCE) price index, the central bank’s preferred inflation reading, is projected to slow to 2.4 percent by the end of the year and approach 2.1 percent by the end of 2025. As for the labor market, job creation is forecasted to average 139,000 per month in 2024 and 117,000 in 2025, with the unemployment rate rising to 4.1 percent later this year.
Simona Mocuta, committee chair and chief economist at State Street Global Advisors, emphasizes the importance of celebrating last year’s combination of resilient growth and moderating inflation, which is unusual historically. She believes that the elements are in place to extend a milder version of this in 2024, although risks to the outlook still exist. The committee sees risks to the growth forecast as fairly balanced, but risks to the inflation forecast remain skewed to the upside.
The positive outlook comes after the U.S. economy expanded by a higher-than-expected 3.4 percent in the fourth quarter of last year, fueled by increased consumer and government spending. Looking ahead to the first quarter of this year, estimates from various sources forecast growth rates ranging from 1.3 percent to 2.1 percent.
However, there is mixed commentary on the narrative of a soft landing for the economy. While the White House declared a successful soft landing, Treasury Secretary Janet Yellen, Fed Chair Jerome Powell, and other policymakers remain cautious. Powell reiterates that a soft economic landing continues to be an uncertain outcome, even though the central bank’s dual mandate of maximum employment and price stability is moving into better balance.
The Fed is expected to proceed with three quarter-point rate cuts in mid-2024, according to the ECA consensus. This aligns with the central bank’s updated Summary of Economic Projections (SEP), which forecasts a median policy rate of 4.6 percent by the end of the year. Investors are also anticipating three rate cuts, with the first reduction possibly occurring in June.
Experts note that while the Fed is comfortable with keeping rates elevated for longer until the inflation threat has been defeated, they will eventually be forced to cut rates. The aim is to gradually bring inflation back to the 2 percent target through a series of rate cuts next year and beyond. However, there are associated risks of economic and market volatility when the Fed cuts rates.
The recent data releases have shown higher-than-expected inflation in the first two months of 2024, causing officials to exercise caution. The Consumer Price Index (CPI) rose to 3.2 percent in February, and the Producer Price Index (PPI) advanced by 0.6 percent monthly. The PCE price index also rose to 2.5 percent last month, indicating the need for vigilance in controlling inflation.
Overall, economists are optimistic about the U.S. economy in 2024, with decreasing recession risks and moderating inflation. While risks remain, there is hope for continued growth and stability, provided that policymakers navigate the challenges ahead carefully.
