US economic outlook: January 2024
|The facts have compelled us to change our US economic outlook
The moonshot in inflation that occurred in 2021-22 had two important consequences. Not only did it erode real income, but it led to a hawkish response by the FOMC. Consequently, in June 2022 we began to forecast a looming U.S. recession.
In the spirit of John Maynard Keynes, the facts have compelled us to change our minds. In short, we now look for the U.S. economy to continue expanding over our entire forecast period, which runs through the end of 2025.
Real income growth has turned positive again due to the marked decline in inflation over the past year or so. Furthermore, it appears that the FOMC's tightening cycle has come to an end. Expectations of monetary easing by market participants have led to a relaxation in financial conditions, which are exerting less restraint on the economy than they were a few months ago.
We look for the FOMC to cut its target range by 125 bps by the end of this year and by a total of 225 bps by the end of 2025. We think the first rate cut of the easing cycle will occur at the May 1 FOMC meeting.
Although we now think it is more likely than not that the economy will continue to expand in coming quarters, we readily acknowledge that the economy is not completely out of the danger zone. The baseline probability of recession at any point in time is roughly 15%. Knowing what we know presently, we would now guess the probability of a U.S. recession this year is roughly 40% or so.
A vicious circle of slower spending growth leading to cutbacks in employment that subsequently cause spending to downshift further appears less likely than it did when inflation was raging. Margins generally remain healthy for most businesses, and many firms appear to be in no hurry to cut staff.
Even if the economy does not slip into an official recession—real GDP could conceivably contract modestly in one of the next few quarters—we suspect that the pace of real GDP growth will be sluggish over the next few quarters. We forecast that real GDP will grow only 1% or so between the fourth quarter of last year and Q4-2024, considerably slower than the 2.4% per annum average growth rate during the previous economic expansion (2010-2019).
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.