As we step into 2024, the economic landscape of the United States presents a picture of cautious optimism. The year is expected to unfold under the shadow of the previous year's economic policies and global dynamics. Here's an overview of what top financial institutions are forecasting for the US economy in 2024.
The consensus among economic experts suggests a deceleration in economic growth, with real GDP growth potentially walking a tightrope between slight expansion and contraction. After a better-than-expected growth rate of 2.8% in 2023, forecasts indicate a more modest pace of around 0.7% for 2024. This slowdown reflects the broader impact of monetary policy and the fading post-pandemic tailwinds.
The Federal Reserve's hiking cycle is presumed to have concluded, with policy rates expected to hold at 5.25%-5.5% until mid-2024. Assuming inflation continues its downward trajectory, the Fed may begin to normalize policy rates, with predictions of 25 basis point cuts at each meeting starting in June, targeting a range of 4.00%-4.25% by year-end.
The US consumer is anticipated to face challenges, with consumer spending growth likely to slow due to factors such as diminished excess savings and plateauing wage gains. Despite these headwinds, consumer spending is expected to remain positive, albeit at a lower rate than in 2023.
The fiscal boost that significantly supported the economy in 2023 is expected to reverse, potentially becoming a slight drag on the economy in 2024. The federal deficit is forecasted to narrow, reflecting a degree of fiscal restraint.
After notable declines in 2023, business investment and housing activity are set for a foundation of improved performance in 2024. However, the outlook remains cautious amid higher interest rates.
The labor market is expected to maintain its tightness, supporting employment and income levels. This stability plays a crucial role in underpinning the overall economic resilience.
Economic Forecast for the Next 5 Years
The US economy has experienced significant changes in recent years, including unprecedented events like the COVID-19 pandemic, political changes, and a global economic downturn. As we move forward, many people are interested in knowing what the future holds for the US economy over the next five to ten years. This section of the article provides an economic forecast for the next five to ten years, with a focus on economic output, inflation, interest rates, and the labor market.
The CBO's economic projections provide valuable insights into the US economy's future. While the US economy is projected to experience some challenges, including a tight labor market and rising interest rates, the economy is expected to continue growing, with a projected growth rate of 2.4 percent per year from 2024 to 2027.
Inflation is also expected to gradually decrease over the next few years, approaching the Federal Reserve's long-term goal of 2 percent by 2026. Interest rates are projected to rise in the near term but then gradually fall beginning in late 2023. The labor market is expected to be tight in the near term, with the unemployment rate projected to increase before gradually declining over the next few years.
These projections provide useful information for individuals, businesses, and policymakers as they plan for the future. However, it is important to note that economic forecasts are subject to uncertainty and can be influenced by a variety of factors, including unexpected events and changes in economic policy.
Economic Output
The Congressional Budget Office (CBO) projects that the US economy's output, or gross domestic product (GDP), will stop growing early this year in response to last year's sharp rise in interest rates. However, output is expected to start growing again during the second half of 2023, as falling inflation allows the Federal Reserve to reduce interest rates, causing rebounds in sectors of the economy that are sensitive to interest rates.
In CBO's projections, the growth of GDP comes to a halt in early 2023, mainly because of the sharp rise in interest rates last year, and then resumes at a slow pace. For 2023 as a whole, real GDP (that is, GDP adjusted to remove the effects of inflation) is projected to grow by just 0.1 percent. The growth of real GDP is projected to speed up thereafter, averaging 2.4 percent a year from 2024 to 2027, in response to declines in interest rates.
Inflation
Inflation was higher in 2021 and 2022 than in any other years of the previous four decades, with a rate of 5.7 percent and 5.5 percent, respectively, as measured by the price index for personal consumption expenditures. The annual growth of that price index is projected to remain above the Federal Reserve's long-term goal of 2 percent through 2024 and then fall near to that goal by 2026.
However, CBO projects that inflation will slow gradually in 2023 as pressures ease from the factors that have caused demand to grow more rapidly than supply in recent years. The PCE inflation is projected to be 3.3 percent in 2023 and 2.4 percent in 2024. PCE inflation is projected to continue declining thereafter, approaching the Federal Reserve's long-run goal of 2 percent by 2026.
Of the categories that make up the PCE price index, food, energy, and shelter-related services are projected to experience the largest slowdowns in price growth in the next few years.
Interest Rates
Interest rates on Treasury securities are projected to rise further in early 2023 and then gradually fall beginning in late 2023. In CBO's projections, interest rates on short-term Treasury securities move largely in concert with the federal funds rate, which the Federal Reserve sets. In the near term, CBO expects the federal funds rate to rise to 4.5 percent by the end of 2023 and to remain at that level for several years.
CBO has increased, on average, its projections of short- and long-term interest rates over the next five years, mostly because it has raised its near-term projections of inflation since May 2022.
Labor Market
The labor market is expected to be tight in the near term, with the unemployment rate projected to increase from 3.6 percent at the end of last year to 5.1 percent at the end of 2023 before gradually declining to 4.5 percent by the end of 2027.
Economic Outlook for 2028 to 2033: Projections and Analysis
This section will examine the CBO’s projections for income, GDP, and the overall economic outlook for the five years, between 2028 to 2033. The CBO’s economic projections for 2028–2033 indicate that the economy is projected to grow at its maximum sustainable output. However, this projection is subject to a high degree of uncertainty, and the actual economic growth rate could be affected by various factors. Despite this uncertainty, the projections offer insights into the potential growth rate of the economy, which is an essential consideration for policymakers, investors, and businesses alike.
Projected Growth of Real Potential GDP
The CBO projects that real potential GDP will grow at an average rate of 1.8% annually between 2028 and 2033. This growth rate is similar to the average annual growth rate of real potential GDP since 2007. However, this overall growth rate conceals two distinct components of growth: potential labor force growth and potential labor force productivity growth.
The potential labor force is projected to grow more slowly annually over the 2028–2033 period than it has since 2007, on average. In contrast, potential labor force productivity is expected to grow more rapidly than it has since 2007.
Projected Growth of Real GDP
Real GDP is projected to grow at an average rate of 1.8% annually between 2028 and 2033, the same rate as real potential GDP. This projection suggests that the economy will be operating at its maximum sustainable output over the next five years. However, this projection is subject to a high degree of uncertainty.
Projections of Income for 2023 to 2033
The CBO projects that nominal gross domestic income (GDI), which represents the total income earned in the production of GDP, will grow moderately through 2033. The projection estimates that nominal GDI will grow by 3.1% in 2023, an average of 4.8% in 2024 and 2025, and an average of 4.0% from 2026 to 2033. By the end of 2025, the nominal GDI is projected to be 35% higher than it was before the pandemic. By the end of 2033, it is expected to be 85% higher than before the pandemic.
Uncertainty About the Economic Outlook
The projections offered by the CBO are subject to a high degree of uncertainty. This uncertainty stems from a range of factors, including the effect of higher interest rates on overall demand, the easing of supply-chain disruptions, and labor market participation. Additionally, the growth of potential output in the aftermath of the pandemic could be faster or slower than expected.
Understanding the US Economic Cycle
The US economy goes through a cycle of expansion and recession, which has a significant impact on the country's economic growth, employment, and overall well-being. To help policymakers, researchers, and businesses understand the current state of the economy, the National Bureau of Economic Research (NBER) maintains a chronology of US business cycles.
What is Business Cycle Dating?
Business cycle dating is the process of identifying and dating the peaks and troughs of economic activity in an economy. The NBER's Business Cycle Dating Committee is responsible for determining the beginning and end dates of recessions and expansions in the US economy. The committee's chronology helps to provide a comprehensive understanding of the US economic cycle and serves as a reference point for policymakers, businesses, and researchers.
Understanding the Business Cycle
A business cycle is a period of economic expansion followed by a period of economic contraction. During the expansion phase, economic activity, such as employment, production, and consumption, increases, leading to economic growth. However, economic growth cannot continue indefinitely, and eventually, the economy reaches its peak. At this point, economic activity begins to slow down, leading to a recession.
The NBER defines a recession as a significant decline in economic activity that lasts more than a few months, affecting the economy broadly, and spread across different sectors. In contrast, an expansion is the period between a trough and a peak, during which economic activity increases. Most recessions are brief, and the economy typically returns to its previous peak level of activity or trend path.
How is Business Cycle Dating Done?
To determine the peaks and troughs of the US economy, the NBER's Business Cycle Dating Committee uses a range of monthly and quarterly measures of aggregate real economic activity published by federal statistical agencies. These measures include real personal income less transfers, nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production.
The committee makes a separate determination of the calendar quarter of a peak or trough, based on measures of aggregate economic activity over the relevant quarters. Two measures that are important in the determination of quarterly peaks and troughs, but that are not available monthly, are the expenditure-side and income-side estimates of real gross domestic product (GDP and GDI).
The committee considers these measures and weighs them based on their relevance to the current economic climate. There is no fixed rule about what measures contribute information to the process or how they are weighted in the committee's decisions. In recent decades, the two measures the committee has put the most weight on are real personal income less transfers and nonfarm payroll employment.
Why Business Cycle Dating Matters
Business cycle dating is essential in understanding the current state of the economy and its historical performance. By identifying the peaks and troughs of economic activity, policymakers can develop strategies to mitigate the negative effects of economic downturns and take advantage of economic upturns. Businesses can also use this information to plan their operations and investments.
Moreover, the NBER's business cycle chronology can help researchers understand the causes and consequences of economic cycles. Studying the historical performance of the US economy can provide insights into how economic policies, technological innovations, and external shocks can affect the economy and its various sectors.
ALSO READ: Economic Forecast for Next 10 Years
Sources
- https://www.cbo.gov/publication/58957
- https://www.conference-board.org/research/us-forecast
- https://www.oecd.org/economic-outlook/march-2023/
- https://www.oecd.org/newsroom/economic-outlook-slightly-more-optimistic-but-fragile.htm
- https://www.nber.org/research/business-cycle-dating
- https://www.nber.org/research/business-cycle-dating/business-cycle-dating-procedure-frequently-asked-questions
