U.S. economic outlook: Risks

Our forecast that the economy will achieve a soft landing and avoid a recession could be upended by any number of risks. Here are four:

Rising interest rates across the spectrum

The primary domestic risk to the economic outlook revolves around how households and firms adjust to rising rates along the maturity spectrum, which we think will be one of the expansion’s defining features, if not the defining feature.

In a relatively brief period, the Federal Reserve’s policy rate jumped from zero to 5.5%, and the 10-year benchmark Treasury yield pushed 5% before easing recently to near 4.5% in the middle of November.

The rising cost of just about everything, including financing durable goods, should curtail the robust average 4% increase in spending following the pandemic.

Our recent RSM US Middle Market Business Index survey for the third quarter indicated that firms pay an average of 10% to 15% to borrow in credit markets and that 36% of firms have turned to the shadow financing market at these higher rates to finance business expansion.

Rates in that range are not sustainable. Should the Fed continue to hike its policy rate—an outcome we think is highly unlikely—then risks to the expansion will increase. In addition, local and regional banks with unrealized losses could face another round of financial stress.

In addition, more than $3 trillion in corporate debt will need to be rolled over in the coming years. The notes issued in 2020 and 2021 at low single-digit rates will almost surely be rolled over at high single- or double-digit rates. The higher rates will shadow growth prospects later in 2024 and define the outlook for 2025.

Energy markets

Second, geopolitical tensions in the Middle East linked to oil prices are the other risks on the table that could derail the current business cycle. As long as the conflict between Israel and Hamas does not widen to include Iran, we do not expect anything other than short-lived bouts of volatility in oil markets.

China’s debt

Third, the debt and deleveraging cycle underway in China—it takes seven to 10 years for an economy to move through the debt and deleveraging cycle—drags down overall global economic demand and could cause notable economic problems in East and South Asia. At this time, we do not see global systemic risks because of China’s deleveraging. But it requires close monitoring, given the significant role the Chinese play in global demand for commodities.

Political polarization

Finally, we think the upcoming election year presents unique challenges to the outlook. Political polarization is so extreme that it now adds a measure of potential volatility to economic activity. We do not anticipate any fiscal consolidation during the upcoming year as the country approaches the presidential election. Beyond that, we do not expect any significant federal legislation that will get done that adds or subtracts to the fiscal and economic outlook next year.