Economic Commentary

Recent data point to deteriorating growth

December 12, 2023
A woman in a café looks at a tablet.

Highlights from the Monthly Review for December 2023:

The fall brought a softer turn in the data as consumers cut back on purchases while firms in most sectors have reduced hiring. Financial conditions eased over the past month, although Fed rate cuts are not likely to start until mid-year. The economy still has enough momentum to hold off a recession for now, but further weakness is likely to result in a mild recession by mid-2024.

Key Takeaways:

Economic Review: Softer growth and inflation trends to end 2023

Although the overall labor market still appears to be moving forward at a decent clip, most industries show weaker momentum in hiring as the end of the year approaches. It will take some time for these trends to result in slower services inflation (particularly with an unemployment rate consistently under 4.0 percent), but there are clear signs of reduced inflationary pressure across the economy — which should dissuade further rate hikes from the Fed over this cycle. (pg. 2)

Financial Markets: Investors eagerly await the Fed policy pivot

The S&P 500 surged in November as investors grew more confident in a potential soft landing and now expect rate cuts to start in Q1 2024. While price pressures are cooling and there is more disinflation in the pipeline, Fed policymakers are unlikely to hit their inflation goal any time soon. We expect the Fed to wait until May 2024 before starting to cut interest rates. Financial conditions have unwound the tightening that began in mid-September, likely keeping some Fed officials from becoming too dovish in the near term. (pg. 3)

The Outlook: Mild recession more likely than a severe one

Given the volatile conditions over the previous two downturns, a recession outlook might conjure thoughts of high unemployment rates and extensive disruptions for households and businesses. But history shows that the 2007-08 Great Recession and the 2020 Covid Recession are the exceptions, not the rule. Excluding these two events, the average peak-to-trough decline for real GDP since WWII during a recession was only 1.9 percent with about a two-percentage point increase in the unemployment rate.

There are many reasons to except that a potential recession in 2024 will even be less severe than average. Household and business balance sheets are still in solid shape, implying fewer business closings and personal defaults if the economy goes sideways. With labor conditions still tight, widespread layoffs are not predicted which should limit income and spending reductions. While a hard landing appears more likely than a soft one, a recession forecast may not be as dour as thought. (pg. 4)Monthly Outlook for 2024 "See this month's issue" graphic.

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