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The Conference Board Economic Forecast for the US Economy
April 11, 2024
The US economy entered 2024 on strong footing, but headwinds including rising consumer debt and elevated interest rates will weigh on economic growth. While we do not forecast a recession in 2024, we do expect consumer spending growth to cool and for overall GDP growth to slow to under 1% over Q2 and Q3 2024. Thereafter, inflation and interest rates should gradually normalize and quarterly annualized GDP growth should converge toward its potential of near 2% in 2025. US consumer spending held up remarkably well in 2023 despite elevated inflation and higher interest rates. However, this trend is already beginning to soften in early 2024. For instance, retails sales growth over the first few months of the year have been weak. Gains in real disposable personal income growth are softening, pandemic savings are dwindling, and household debt is increasing. Consumers are spending more of their income to service debt and delinquencies are rising. Additionally, the growth in ‘buy now, pay later’ plans may also weigh on future spending as bills come due. Thus, we forecast that overall consumer spending growth will slow in Q2 and Q3 2024 as households struggle to find a new equilibrium between income, debt, savings, and spending. While we anticipate labor market conditions to soften over this period, we do not expect them to deteriorate. As inflation and interest rates abate, consumption should expand once again in late 2024. Following a pop in early 2023, business investment growth slowed in H2 2023 as interest rate increases made financing activities more expensive. This trend should intensify in H1 2024 as the Fed resists calls to cut interest rates likely until June 2024. Residential investment, which had been contracting since 2021, began to grow again in Q3 2023. Persistent demand for homes and a dearth of supply was the driver. However, looking ahead, we do not expect residential investment growth to sustainably improve until interest rates begin to fall. Government spending was a positive contributor to economic growth in 2023 due to federal non-defense spending associated with infrastructure investment legislation passed in 2021 and 2022. This tailwind has not abated and spending on these programs will continue to support GDP growth. However, political volatility surrounding fiscal policy, debt, and outlays could impact government spending over the next few years. Labor market tightness remains remarkably persistent. This trend is underpinned by the retirement of the Baby Boomer generation and the reluctance of businesses to lay off workers. While we do anticipate some softening in the labor market as the economy slows, we do not expect it to unravel. On inflation, much progress was made over the course of 2023 but more recent data show that momentum has slowed. Emerging trends in energy markets and among certain services industries are serving as a headwind, but support from cooling rental prices remains in the pipeline. Given these trends, we are pushing our 2% inflation forecast back one quarter to Q4 2024. While we are maintaining our call for a cut to the Fed Funds rate in June, more progress on inflation will need to be made between now and then. Assuming this happens, we anticipate four 25 bp cuts this year (100bps in total) and an additional four 25 bp cuts in 2025 (100bps in total).
