U.S. economic outlook: Expansion continues in 2024

Solid consumer spending driven by real personal income gains and sustained private investment will underscore a steady pace of growth at or near the 1.8% long-run rate in the United States in 2024.

We expect that policy tailwinds from both the fiscal and monetary authorities will set the stage for strong productivity and growth in the years ahead as inflation eases back to a much more tolerable 2.5% to 3% range.

Most important, we are forecasting four 25 basis-point cuts in the federal funds policy rate starting in June, which would bring it into a range between 4.25% to 4.5% by the end of the year with risk of a lower rate. 

The Fed’s cuts would come in advance of a maturity wall in corporate debt taking full effect in 2025, when companies will need to roll over their notes at higher rates compared to the five-year 2020 vintage.

For gross domestic product, our baseline forecast expects a modest easing in growth following the torrid 2.9% year-ago pace in the third quarter. Growth will then pick back up to at or above trend 1.8% in the second half of 2024 and possibly accelerate into 2025.

Monthly job gains will slow to slightly below the 75,000 level that is necessary to meet labor demand, sending the unemployment rate up from the current 3.9% to a 4.3% cyclical peak. At the same time, inflation will continue to decline from the 9.1% peak in 2022 to 2.5% or lower by the end of 2025.

These two dynamics of robust employment and falling inflation will result in notable gains in real disposable income for American households and will be the difference between the solid expansion that we forecast and a more modest pace of growth closer to 1%.

One encouraging development this year has been rising productivity, which increased by 4.7% in the third quarter and averaged 4% during the previous six months.

With growth in the third quarter advancing at the robust 2.9% rate on a year-ago basis even as hiring cooled, productivity gains, and not necessarily labor, have been fueling these gains. 

Should this increase in productivity continue, our 2024 economic outlook may ultimately be somewhat restrained and the economy could increase its pace of output without stoking inflation fears.

It is clear that firms are continuing to make investments in software and intellectual property to offset growing labor scarcity.

Over the past decade, productivity increases have averaged 1.5%, which is soft compared to the 2.3% of the previous 10 years and the robust 2.8% during the 1990s productivity boom.

We think that this is one area of the economy that may bolster overall economic output because of a potential supply side-induced increase in capacity. Such an increase would be a function of private sector investment and government policies aimed at improving semiconductor supply chains, infrastructure and environment sustainability.

With such strong tailwinds helping the economy, we have revised down the probability of a recession to 25% (55% is the consensus forecast) and are forecasting a 75% probability that the current economic expansion will be sustained.

We make this forecast even as interest rate increases are now being felt in the economy, yields across the maturity spectrum have soared and geopolitical uncertainties threaten global energy prices.