Economic Outlook - March 2024
- The U.S. economy ended 2023 with growth. Counter to fears of an upcoming recession, we forecast economic growth to continue in 2024. The final reading for fourth quarter (Q4) Gross Domestic Product (GDP) came in at 3.2%, marking the sixth quarter in a row of U.S. GDP growth above 2.0%. Amid low unemployment and wage gains, growth in Q4 was driven by a 3.0% increase in consumer spending, including a strong holiday shopping season. Overall in 2023, U.S. GDP growth was 2.5%. Our forecast for Q1 of 2024 is for an increase in GDP of 2.0% – 2.5%. After Q1, we expect growth to decelerate due to the effects of higher interest rates and foresee the U.S. economy growing 1.0% – 1.5% this year.
- Inflation has been receding and trending towards the Federal Reserve’s target of 2.0%. However, current data indicate that progress could be uneven going forward. Both the consumer price index (CPI) and the producer price index (PPI) for January were higher than expected. In addition, the Fed’s preferred measure of inflation, the “core” personal consumption expenditures (PCE) price index, which excludes volatile food and energy costs, provided a mixed result. The core PCE report for January showed the 12-month annualized rate of inflation in line with expectations and dropping slightly to 2.8%. However, when looking at the six month annualized rate, core PCE inflation actually increased from 1.9% to 2.5%. In its quest to get inflation back to its target, the Fed has been explicit that it will need a series of data points showing a consistent pattern of lower inflation in order to begin reducing interest rates.
- The Federal Open Market Committee (FOMC) has left its target range for the federal funds rate unchanged at 5.25% – 5.50% for the last four meetings, most recently in January 2024. While it appears the FOMC may be finished raising short-term rates, the committee has become concerned with the market’s outlook for the timing and pace of potential interest rate reductions. Until very recently, market expectations were for the Fed to lower the target for the federal funds rate six times in 2024. The Fed provides its own outlook for the future levels of the federal funds target rate and those projections currently incorporate three rate cuts in 2024. In public commentary and speeches following the January 2024 FOMC meeting, Fed officials have made a point to push back on those market expectations. Investors have taken notice and the market forecast for rate cuts has now come into line with the Fed’s projections. The FOMC next meets March 19th – 20th and we foresee short rates left unchanged at the meeting.
- International economies are not faring as well as the United States. China, the world’s second largest economy, is in recession, Japan and the U.K. have each had two consecutive quarters of real GDP contraction and Germany has recorded one quarter of contraction following a quarter of no growth. A common theme for these large economies is unfavorable demographics and the structural problems created by an aging population.
Sources: Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, U.S. Federal Reserve, Yardeni Research.
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