The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in early 2023. This outlook is associated with persistent inflation and the Federal Reserve hawkishness. We forecast that real GDP growth will slow to 0.3 percent in 2023, and then rebound to 1.6 percent in 2024.
US GDP growth defied expectations in late 2022, but we expect persistently high inflation and rising interest rates to tip the economy into a brief and mild recession starting in Q1 2023. Real US consumer spending began to contract in the final months of 2022, and we expect this trend to continue over the coming quarters.
Additionally, as the Federal Reserve continues to raise interest rates (we forecast two more 25 basis point hikes over the next two meetings) we expect nonresidential investment to turn negative and residential investment to continue to contract. Finally, volatility in trade and inventory data that boosted growth in Q4 2022 is unlikely to persist in Q1 2023 and will therefore push overall GDP lower.
Labor market tightness will moderate somewhat over the coming quarters but will remain elevated relative to previous economic downturns. This should prevent overall economic growth from slipping too deeply into contractionary territory and facilitate a rebound in late 2023. Inflation will continue to cool over the course of 2023 as well, but the Fed’s 2 percent inflation target will remain elusive. As such, the Federal Reserve will not cut interest rates until next year, in our view.
Looking to 2024, we expect the volatility that has dominated the US economy over the pandemic period to diminish. We forecast that overall growth will return to more stable pre-pandemic rates, inflation will drift closer to 2 percent, and the Fed will bring rates closer to 3 percent. However, due to demographic challenges we expect tightness in the labor market to remain an ongoing challenge for the foreseeable future.
Labor market tightness will moderate somewhat over the coming quarters but will remain elevated relative to previous economic downturns. This should prevent overall economic growth from slipping too deeply into contractionary territory and facilitate a rebound in late 2023. Inflation will continue to cool over the course of 2023 as well, but the Fed’s 2 percent inflation target will remain elusive. As such, the Federal Reserve will not cut interest rates until next year, in our view.
Looking to 2024, we expect the volatility that has dominated the US economy over the pandemic period to diminish. We forecast that overall growth will return to more stable pre-pandemic rates, inflation will drift closer to 2 percent, and the Fed will bring rates closer to 3 percent. However, due to demographic challenges we expect tightness in the labor market to remain an ongoing challenge for the foreseeable future.
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