US economy: 2024 outlook

In 2024, we expect the driving force of US economic momentum to shift from the unwinding of pandemic-related distortions and the accompanying policy response to restrictive monetary policy. We therefore see real US GDP growth slowing from a robust estimated 2.4% in 2023 to 0.8% in 2024, well below its potential, with the economy tipping into a mild recession in the first half of the year.

We expect US inflation to continue decelerating, with the core personal consumption expenditures (PCE) index down from an annual rate of 3.5% in Q4 2023 to 2.6% in Q4 2024. We believe ‘supercore’ (core services ex housing) inflation will only fall gradually, leading to sticky, above-target inflation.

In our view, the labour market should be a key focus in 2024. While 2023 has been a year of so-called ‘immaculate disinflation’, we believe the last mile of reducing inflation further to its 2% target will require a softening labour market. Indeed, we see the unemployment rate rising to 4.5% by the middle of next year.

Peak fiscal expansion is probably behind us and the impact of fiscal policy on economic growth will turn slightly negative in 2024. On the political front, we expect a tight race for all three levels of government in the 2024 election. There is little reason to expect meaningful legislation to be passed before the election given that Congress is divided. Significant fiscal consolidation also seems unlikely after the election.

The Fed hiked rates to their current level of 5.25-5.50% in July, and we believe this is the peak for this cycle. Falling (but still high) inflation will likely encourage the Fed to keep the policy rate on hold until June 2024, when we expect a first rate cut of 25bp. In all, slowing growth and a weakening labour market could push the Fed to cut rates by a total of 125 bps in 2024, bringing the fed funds rate down to 4-4.25% by the end of the year.

The main risk to our central forecast is a harder landing with sharper job losses and a bigger slowdown in growth. There are also many downside risks linked to interest rates remaining persistently high. A violent labour market adjustment due to the weeding out of unprofitable firms, a repeat of the banking crisis of March 2023 or external shocks that are inherently unforecastable could all push the economy into a deeper recession.

On the flip side, there is also a narrow path to a soft landing without a recession if inflation reverts towards target without a further rise in the unemployment rate. Consumers and businesses could remain resilient for longer. Supply-side improvements could raise productivity and labour supply even further, reducing inflation without demand destruction. The Fed would wait longer to cut rates in this scenario and do so more slowly.