- Inflation stays high at 3.4%, but is expected to come down to 2.4% in 2024
- US economy’s growth rate expected to fall from 2.5% to 1.5% in 2024
Since the Fed began hiking interest rates in May of 2022, the pair of distant cousins, ‘inflation’ and ‘recession,’ have become permanent guests at our dinner tables.
Using the Personal Consumption Expenditure (PCE) as a gauge of inflation, the Fed started a series of rate cuts back in 2022 in order to curb an ever-rising inflation from rising even further. In October ’23, the PCE grew by 3.4% y-o-y, meaning prices in the US went up by 3.4% in October compared to a year earlier.
However, the latest semiannual forecast from Congressional Budget Office (CBO) which was published on Friday, suggests that inflation might ease down to around 2.4% in 2024, which is exactly where the Fed prefers inflation to be. The Fed in its recent press conference even hinted at a potential wave of rate cuts in 2024 – 3 to be precise – which might lead to a reduction in interest rates by 75 basis points in total. The stock and the bond market rallied based on this signal given by the Fed – however, it seems like the party was thrown a bit too prematurely. While markets anticipate rate cuts starting in March next year, comments from officials like New York Fed president John Williams and Atlanta’s Raphael Bostic imply that these cuts might not happen before late summer or early fall.
While a reduction in inflation is of course great news, what remains to be seen is how the economy picks up pace (or doesn’t) in the next year. The CBO estimates a fall in the growth rate of real gross domestic product (GDP, adjusted to remove the effects of inflation) from 2.5 percent in 2023 to 1.5 percent in 2024 owing to a weakening in consumer spending and reduced investment in private nonresidential structures. Last month, total nonfarm payroll showed a surprise improvement and rose by 199,000, with the unemployment rate dropping to 3.7%, as per the data provided by U.S. Bureau of Labor Statistics. The growth in payrolls was driven by a boost in hiring in the government, hospitality, and healthcare sectors as well as in the manufacturing sector – which benefitted from the end of the auto worker’s strike. Employment growth remained below the average monthly gain of 240,000 over the prior 12 months but was in line with job growth in recent months. Notably, sectors like retail faced a decline in payrolls, while hiring in the tech and finance sectors remained stagnant.
Thus, while the inflation fears seem to be ebbing away – they are making room for newly founded worries about recession. According to Outlook Survey Panel conducted by National Association of Business Economics (NABE), 75% of the economists surveyed assigned a probability of 50% to recession taking place in 2024. While it is no surprise that the US economy has started slowing down, what remains to be seen is if the magnitude of this slowdown can lead to a recession for the US.
So 2024, we’re watching you closely with eyes wide open.
