US Recession 2024: Predictions, factors leading to slowdown in American economy – Investing Abroad News

By Amit Goel

In December 2022, economists and investors widely predicted a US recession in CY 2023. Yet, they were mistaken. The US thrived economically in 2023 without any signs of recession.

In 2022, inflation surged to multi-decade highs due to supply chain disruptions, the Ukraine war, high energy costs, and excessive stimulus measures, eroding consumer purchasing power and straining businesses. Central banks responded by aggressively hiking interest rates to curb inflation, which led to heightened borrowing costs, potentially choking off economic growth.

Parallelly, China faced its own issues like a housing market crisis and sluggish growth, potentially causing global repercussions by impacting international trade and investments.

Elevated levels of corporate and government debt raised concerns about financial stability, particularly regarding the ability of borrowers to weather economic shocks. Another warning sign emerged in the form of an inverted US yield curve during the first half of 2023, where longer-term yields fell significantly below shorter-term yields, historically indicating an impending recession.

Why we thought a recession was unlikely in 2023?

We considered the US recession as an unlikely scenario for CY 2023 because US economy had multiple tailwinds going into the year which were strong enough to override the negatives.

The robust start of the US labour market in 2023 was a promising sign for consumer spending, pivotal to the US economy.

Between December 2020 and October 2023, spending on computer and electronic manufacturing surged by over 900% in the US. This explosive growth is fuelled by the country’s efforts to reduce dependence on Asian semiconductor supplies, notably supported by legislation like the IRA and CHIP acts. These laws provided funding for crucial projects, showcasing a promising outlook as early as late 2022.

Concurrently, China’s reopening by late 2022 boded well for the global economy in 2023. Despite Chinese equities being impacted by a property market meltdown, the global economy thrived as anticipated.

Moreover, Omicron faded by mid-2022 but loomed over travel and entertainment throughout the year. Looking to 2023, a strong service sector rebound, especially in travel and entertainment, seemed poised to prevent a US recession.

Meanwhile, US inflation peaked around mid-2022, setting a promising course for 2023. With inflation as a key factor affecting confidence in 2022, any potential decline would become a big positive for the economy which is exactly what panned out this year.

Why economists think a recession is unlikely in 2024?

The US labour market remains strong with most economists predict continuous economic expansion in 2024, despite signs of a potential growth slowdown. Inflation has slowed, likely nearing the Fed’s 2% target, hinting at a “soft landing”. Despite rising prices, consumer spending stays resilient, backed by consistent real wage growth and record-high household wealth, bolstering the economy through 2024.

Why we think a recession is very likely in 2024?

Our macro analysis suggests that the US economy will enter a recession in 2024. The reasons are as follows:

Money supply and growth rate

Comparing M2 growth to nominal GDP growth is a gauge of economic strength. When M2 outpaces GDP, it often fuels growth. Conversely, if GDP outpaces M2, a slowdown or recession looms. The recent -9.9% reading in the US suggests an emerging slowdown, hinting at a potential recession ahead.

Savings Contracting

The Net saving as a percentage of Gross National Income is an indicator which has always dipped before a US recession. Whenever it falls into negative, US has had a severe recession like in 2008-09 and during covid. This ratio has again fallen into negative in 2023, pointing towards a deep recession in US in CY 2024.

High base effect

US economy soared in the past two quarters, setting a high base for consumer and business spending entering CY 2024. Despite a strong footing, a healthy growth rate in H1 2024 seems unlikely. By the first half’s end, the economy may slow to stall speed, raising the likelihood of a recession in H2 2024.

Lagged impact of FED rate hikes

The interest rate hikes usually effect the economy with a one-to-one-and-a-half-year lag and hence all the hikes of 2022 and 2023 will have largely played out in the economy by H2 of 24.

Tightening Fiscal Impulse

Government spending was pivotal in supporting the economy in CY 2022 and 2023. With immense pressure on the Federal government to control fiscal deficit, we anticipate a significant reduction next year, potentially restraining the US economy.

Miscellaneous factors

Other indicators hint that beneath the apparent strength, the US economy is weakening. The US Leading Economic Index (LEI) fell by 0.5% in November 2023 indicating an unprecedented 8% contraction this year signalling an increased likelihood of a recession in CY 2024. Similarly, the US unemployment rate bottomed out at 3.1% seven months ago, and despite a strong job market, there’s a notable worsening in job sentiment.

Implications for Global Markets

We foresee a hard landing for the US economy in CY 2024, impacting global assets significantly. US equities may drop by 20% from their December 2023 peak, while Indian equities, particularly small and mid-cap indices, could see declines of 25% and Nifty may fall by 15% from their January 2024 highs.

Gold is anticipated to surge to around USD 2400 by year-end, and long-term government bonds across developed and emerging markets, including Indian 10-year G-Sec yields, might thrive, potentially falling below 6.5%.

(Autor is Co-Founder and Chief Global Strategist at Pace 360 and the views expressed are personal)