Dive Brief:
- The economy is sputtering toward a brief, near-term recession amid tightening credit, falling equity prices and declining new orders for manufactured goods, the Conference Board said Monday.
- After exceeding forecasts this year, U.S. gross domestic product will probably expand by just 0.8% in 2024, the Conference Board said, reporting on a decline last month in its Leading Economic Index.
- “The Conference Board expects elevated inflation, high interest rates and contracting consumer spending — due to depleting pandemic spending and mandatory student loan repayments — to tip the U.S. economy into a very short recession,” Justyna Zabinska-La Monica, the Conference Board’s senior manager for business cycle indicators, said in a statement.
Dive Insight:
The Conference Board’s LEI has fallen since December 2021 even as the economy during the past several months — driven largely by unexpectedly robust consumer spending — defied predictions of recession.
GDP growth surged at an annual rate of 4.9% during the third quarter and, although slowing, will probably end the current quarter at a 2% annual pace, according to the Atlanta Fed.
Like many private sector analysts, Federal Reserve economists this year have scuttled predictions of recession even as the central bank pushed up the main interest rate at the fastest pace in four decades.
Policymakers, seeking to cut inflation to their 2% target, have increased the federal funds rate since March 2022 from near zero to a range between 5.25% and 5.5%, a 22-year high.
“The conditions for inflation to return to target are in place, and the heaviest blows from monetary and fiscal tightening are well behind us,” David Mericle, chief U.S. economist at Goldman Sachs, said in a report. The U.S. economy will likely grow 2.1% next year, and faces only 15% odds of a downturn.
Recent reports of weakening retail sales, reduced hiring and falling price pressures suggest the Fed may achieve a so-called soft landing — restoring inflation to 2% without causing widespread job loss or recession.
The Fed has stopped tightening and will probably begin to trim the federal funds rate late in the second quarter of 2024, cutting it a full percentage point by the end of the year to a range between 4.25% and 4.5%, Moody’s Investors Service said Monday in a report.
Inflation will likely “drop to the Fed’s [2%] target by the end of 2024, supported by a cooling labor market and ongoing deceleration in wage growth,” Moody’s said.
JPMorgan Chase predicts the central bank will begin reducing borrowing costs sometime during the second half of next year, while Goldman Sachs says the first cut will likely occur during the final quarter of 2024.
Top executives at companies in the Standard & Poor’s 500 index apparently see progress in easing price pressures. They cited inflation during recent quarterly earnings calls less than at any time since Q2 2021, FactSet said.
Also, the number of S&P 500 companies mentioning “recession” on earnings calls has fallen for five straight quarters, according to FactSet.
Yet the economic outlook is far from cloud-free. Consumers, who fuel nearly 70% of economic growth, are showing signs of caution.
Amid high borrowing costs, the average application rate among consumers for any kind of credit fell during the past year to 41.2% from 44.8% in 2022 and 45.8% before the pandemic, the New York Fed said Monday, describing results of its Credit Access Survey.
Also, “there was a slight increase in the subjective financial fragility of U.S. households, with the average reported probability of being able to come up with $2,000 if an unexpected need arose within the next month falling to” the lowest level since the start of the data series 10 years ago, the New York Fed said.
Only 65.8% of respondents said they could come up with $2,000 within the next month compared with 67.5% last year, according to the New York Fed.
