As we approach the close of 2023, reflecting on the state of the U.S. economy this year reveals a story of resilience and determination. Despite facing challenges such as the prolonged conflict in Ukraine, the recent Israel-Hamas war, China’s ongoing property crisis, persistent domestic inflation, and the resumption of student loan repayments, the U.S. economy has proven more robust than initially anticipated.
This resilience extends across various sectors, encompassing the labor market, consumer spending, and even the banking sector, which appeared shaky earlier in the year amid regional bank concerns. A pivotal moment in 2023 has been the Federal Reserve’s commitment to maintaining elevated interest rates.
Outperforming Expectations in 2023
Although Federal Reserve Chair Jerome Powell and colleagues were initially surprised by the persistence of inflation, they have demonstrated resolve by raising rates to multi-year highs. Despite expectations for a “pivot” from rate hikes to cuts, this shift has not materialized. The Fed has temporarily paused rate hikes but has dismissed the possibility of rate cuts in the near future, leaving open the option of further rate increases if deemed necessary.
At the start of the year, few anticipated U.S. real GDP growth exceeding 2% in 2023. However, current estimates project growth between 2.4% and 2.6%. Notably, while Europe and China experienced disappointing growth in 2023, the U.S. economy outperformed expectations, defying the recession fears prevalent among economists.
Forecasting the U.S. Economy in 2024
Forecasts for the U.S. economy in 2024 vary. Economists polled by Reuters predict a 1.2% expansion, while the Conference Board forecasts 0.8% GDP growth in its November report. The consensus suggests a significant slowdown in U.S. economic growth after the over 2% expansion witnessed in 2023, sparking discussions about the possibility of a recession, with brokerages assigning varying probabilities.
Can the U.S. Avoid a Recession in 2024?
According to Reuters’ estimates, PIMCO places a 50% probability on a U.S. recession in 2024, while Deutsche Bank foresees a mild recession in the first half of the year. JP Morgan, among the most bearish on U.S. stocks, anticipates a recession and envisions the S&P 500 Index falling to 4,200 by the end of the year. In contrast, Goldman Sachs remains optimistic, seeing limited risk of a recession in 2024 and expecting U.S. growth to outpace its developed market peers.
The Yield Curve Test
The historical yield curve inversion, where 10-year Treasury yields fall below 2-year yields, has traditionally preceded recessions since 1955. Despite multiple instances of the yield curve flashing warnings since 2022, a recession has not materialized. Notably, corporate earnings calls reflect a diminishing concern about recession, with only 53 of the S&P 500 companies mentioning it between Sept. 15 and Nov. 16, compared to a peak of 237 in Q2 2022.
Why a ‘Soft Landing’ Appears Likely
As of now, a soft landing seems the most probable scenario for the U.S. economy in 2024. The slowing economy should exert downward pressure on inflation, and unless energy prices disrupt the trajectory, the Federal Reserve may initiate interest rate cuts in the latter half of 2024. While economic growth in the coming year may be lower than in 2023, the resilient labor market is expected to stave off a recession, at least for the time being.
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