Can the U.S. avoid a recession in 2024?

We expect the U.S. economy to meander slowly through late cycle dynamics in 2024.

Over the course of 2023, U.S. macroeconomic indicators have continued to surprise on the upside, presenting a picture of resilience, with the U.S. economy growing at a 4.9% annualized rate in 3Q 2023. This, coupled with the progress made on subduing inflation, supported our base case of decelerating growth without the risk of an imminent recession. However, we still think economic risks are tilted toward the downside, warranting some investor caution.

Breaking down U.S. gross domestic product (GDP) into its component parts, personal consumption, which accounts for around 68% of GDP, could face headwinds in the year ahead. Looking at the consumer balance sheet, credit card balances are rising while excess savings are dwindling. Other factors, such as rising energy costs and the expiration of the student loan moratorium and childcare benefits, could further weigh on consumption. However, firmer-than-expected retail sales data this year continue to buck the trend, demonstrating resilient consumer demand and potential buffers built into household balance sheets. On balance, we think absent a sharp spike in unemployment, consumption growth will likely remain positive, albeit with slowing momentum.

Historically, the swing factor that often tips the U.S. economy into a recession is investments. Residential investments have already exhibited meaningful declines. With mortgage rates north of 7%, homebuyer sentiment and demand have dipped as evidenced by data from the National Association of Home Builders. This, in turn, has significantly dragged construction activity.

Turning to corporates, enthusiasm about artificial intelligence (AI) and the CHIPS and Science Act have bolstered business investments this year, despite elevated borrowing costs. Looking ahead, corporate margins will likely be squeezed on account of the softening inflation backdrop and weaker pricing power. This could be exacerbated by high interest rates and limited signs of moderating wage growth. As it stands, private non-residential investments in 3Q 2023 only grew 1.6%, compared to a massive 23% increase in 1H 2023. Data highlighting future capital expenditure intentions are also weakening. The cautious sentiment among corporates could trigger not just a pullback on investments but also hiring, which could push the economy toward the edge of a recession.

Ultimately, the state of the economy in 2024 will largely hinge on the Federal Reserve’s (Fed’s) policy stance. Overtightening or keeping rates high for too long could exacerbate the strain on various sectors of the economy. For one, higher-for-longer interest rates could exert undue pressure on the financial sector, whether it is through banks’ balance sheets or via the private market.

Exhibit 1:

Source: U.S. Bureau of Economic Analysis, J.P. Morgan Asset Management; (Left) Federal Reserve Bank of Atlanta, U.S. Department of Labor; (Right) Federal Reserve Bank of New York. *Real wage growth is calculated by taking the year-over-year change in Atlanta Fed Hourly Wage Growth Tracker adjusted using the U.S. Consumer Price Index. **Axis cut off to maintain reasonable scale. ***CAPEX refers to capital expenditure. ****Future capital expenditure intention is the difference between the percentage of businesses looking to increase capital expenditure vs the percentage of businesses looking to decrease capital expenditure over the next 6 months.
Guide to the Markets – Asia. Data reflect most recently available as of 30/09/23. 

 

Should we skirt such an outcome, we expect the U.S. economy to meander slowly through late cycle dynamics in 2024. Any recession will likely be mild, given the lack of excesses or systemic imbalances. However, we would caution that the overhang of political risks, both within the U.S. and other regional blocs, could increase the tail risks to our core scenario and outlook. This merits some degree of caution as we look ahead into 2024.