US Economic Growth and Recession Risk

Growth slowing after 2023’s surprising resilience.
- Real GDP growth near zero for 2024 overall.
- H1 2024: modest growth (~1.3%).
- H2 2024: mild recession expected.
Financial conditions remain tight, weighing on cyclical sectors and stressing private sector balance sheets.
Business financial stress and default rates likely to rise, with slowing revenues exacerbated by a strong dollar impacting exporters.
Capex boom from 2023 (e.g., CHIPS, IRA) is fading, with no sharp reversal but slower growth ahead.

Labor market cooling:
- Nonfarm payroll additions slowed to below 200k/month (pre-pandemic average).
- Unemployment rising slowly, expected above 4% in H1 2024 and climbing further during recession.
Consumers remain resilient due to solid labor income and mortgage debt mostly fixed-rate with low payments relative to income.
However, headwinds growing from rising credit card interest costs, student loan repayments resuming, and tighter lending conditions reducing large durable goods demand.

Disinflation expected to continue through 2024:
- Core PCE inflation forecast falls from 3.2% (Nov 2023) to 2.2% (Q4 2024).
- Vehicle prices and rent inflation driving much of disinflation.
- “Supercore” inflation (non-rent core services like food services, healthcare) moderates more slowly due to sticky wage pressures.
Wage growth is key risk:
- Elevated wages may sustain “last mile” inflation, risking inflation reacceleration if labor market tightness persists.

Fed likely done hiking rates, with a first 25bp rate cut expected June 2024.
Aggressive easing unlikely until recession begins (expected H2 2024).
Once recession starts (~Sept 2024), expect a rate cutting cycle of 25bp per meeting and end to balance sheet reduction (QT).
Rate cuts limited pre-recession historically and usually preceded by financial stress; absent such stress, easing will be cautious.

Rising real interest rates due to Fed tightening and slowing inflation.
Credit tightening and business financial stress expected to depress investment and capex, causing recession in second half of 2024.
Unemployment expected to rise to ~5% by end of 2024 and mid-5% range in 2025.

No significant fiscal stimulus expected in 2024 due to divided government and presidential election year dynamics.
Inflation concerns and deficit worries likely to restrain stimulus appetite.

Soft landing possible if demand stabilizes despite tight financial conditions and household balance sheets remain strong.
Fed’s reaction function may shift to more dovish stance, increasing risk of faster rate cuts and possible inflation reacceleration.
Severe recession and financial stress possible but base case is mild recession; past recessions often accompanied by equity sell-offs and credit stress.