Annual outlook: Weathering the storm

Summary

Despite the 525 bps of rate hikes that the Federal Open Market Committee (FOMC) has implemented since March 2022, the U.S. economy generally remains resilient due, in large part, to continued strength in consumer spending. Meanwhile, inflation has receded.

We believe it would be premature to claim that the economic storm has passed, because the battle against inflation has not yet been decisively won.

There already are some cracks that are beginning to appear in the economy, and these strains likely will intensify in the coming months as monetary restraint remains in place. Our base case is that real GDP will contract modestly starting in mid-2024.

We look for the FOMC to cut its target range for the federal funds rate by 225 bps by early 2025, which is more than both Fed policymakers and market participants currently project.

Even if Fed policymakers are able to pull off a “soft landing,” real GDP growth in 2024 likely will be subpar, at best, due to the elevated level of real interest rates that will be needed to wring inflation out of the economy.

The Sun Belt and Mountain West have outperformed the Northeast and the Midwest in recent years, and these trends likely will remain in place for the foreseeable future.

In the commercial real estate market, storm clouds hover above the office sector and the multifamily sector. Fundamentals in the retail and industrial sectors are stronger.

We believe the global economy will face an unsettled climate in 2024, and the economic storm could be quite severe at certain times and for certain economies. In our view, the Eurozone and United Kingdom will be the hardest hit. China's economy likely will continue to face structural headwinds to growth. In contrast, the economic outlook for 2024 remains relatively sunny and clear in India.

The U.S. dollar should generally remain well-supported versus most foreign currencies in the first half of 2024. We then look for the trend of U.S. dollar strength to eventually wane and turn to U.S. dollar weakness later in 2024 as the Fed eases monetary policy. 

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