The US economy started 2024 on strong footing. Various indicators of business activity, labor markets, sentiment, and inflation are moving in a favorable direction. However, headwinds including rising consumer debt and elevated interest rates will weigh on economic growth. With these factors in mind, The Conference Board is upgrading its US forecast for the year. While we no longer forecast a recession, we do expect the consumer spending growth to cool and for overall GDP growth to slow to under 1% in Q2 and Q3 2024. Thereafter, inflation and interest rates should normalize and quarterly annualized GDP growth should converge toward its potential of near 2 percent in 2025.
US consumer spending held up remarkably well in 2023 despite elevated inflation and higher interest rates. However, this trend is unlikely to hold, in our view. Real disposable personal income growth struggled to outpace real consumer spending in H2 2023, pandemic savings are dwindling, and household debt is rising (along with delinquencies). 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 gradually slow to a standstill in Q3 2024 as households struggle to find a new equilibrium between income, debt, savings and spending. While we expect 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 Q2 2023, business investment growth slowed materially 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 until June 2023. 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 meaningfully improve until interest rates begin to fall.
Government spending was a positive contributor to growth in 2023 due to federal non-defense spending associated with infrastructure investment legislation passed in 2021 and 2022. However, growth is likely to slow in 2024 and 2025 as infrastructure spend out stabilizes. Furthermore, political volatility surrounding fiscal policy, debt, and outlays could impact government spending over the next few years.
Labor market tightness has been remarkably persistent over the last year. As this should continue over the coming quarters, we do not expect labor markets to unravel even as the economy slows. The tightness largely reflects a shrinking labor force as Baby Boomers retire. As such, businesses are likely to be resistant to lay off workers. Indeed, this persistence should prevent overall economic growth from slipping into contractionary territory and facilitate a rebound next year.
On inflation, we expect to see continued progress over the coming quarters. Supply chains are continuing to heal and price pressures emanating from dwellings and services continue to moderate. Notably, services demand should cool as consumer spending wanes, but upward wage pressures may persist. We expect year-over-year inflation readings to hit the Fed’s 2 percent target in Q3 2024. This expectation will trigger rate cuts starting in June 2024. We anticipate 25 basis point cuts at every meeting (125bp in 2024) until rates fall below 3 percent in Q3 2025.
