The Conference Board forecasts that weaknesses emerging in some parts of the economy will intensify and grow more diffuse over the coming months, leading to a recession.This outlook is associated with numerous factors, including, persistent inflation, Federal Reserve hawkishness, dampened bank lending amid the banking crisis, reduced government spending due to the debt ceiling deal, and underlying trends in consumer spending and income, and business investment.We forecast that real GDP growth will slow to 1.0 percent in 2023, and then fall to 0.0 percent in 2024.
Consumer spending has fallen in four of the last six months.However, a large spike in January and a smaller spike in April offset this weakness.While spending on services has continued to gradually expand, spending on goods has been volatile.
Recent PMI data suggest that the services sector is beginning to cool, and we expect high interest rates to further dampen spending on goods.We forecast that overall consumer spending will grow in Q2 2023 but anticipate a contraction in H2 2023.
Two trends underlie the recent persistence in consumer spending, but both are likely fading.First, excess savings associated with federal government checks to households amid the pandemic period buttressed consumer balance sheets , but our assessment of these savings show that they are being depleted and will likely runout before the end of the year.
Second, gains in disposable personal income have outpaced inflation since last summer.However, tightness in the labor market is moderating somewhat and wage gains are slowing.We expect this trend to continue as the economy cools and unemployment ticks up.Another notable drag on future consumer spending will be the reintroduction of mandatory student loan repayments in September.
Meanwhile, business investment continued to cool in Q1 as high interest rates and concerns about the future weighed on companies.These trends will likely worsen under the weight of high interest rates (we believe the Fed is done raising rates but don’t expect to see any rate cuts until 2024) and weakening consumer demand.Additionally, commercial and industrial lending by banks continues to slow in the wake of the US banking crisis.Residential investment, which is highly sensitive to Fed policy, has already contracted significantly as interest rates have climbed.We don’t expect a recovery in this sector until rates begin to fall next year.
Government spending represented one of the few positive growth drivers for 2023 as federal non-defense spending benefited from outlays associated with infrastructure investment legislation passed in 2021 and 2022.
However, reductions in discretionary outlays ($1.5 Trillion over 10 years) detailed in the Fiscal Responsibility Act (which averted the debt ceiling crisis) will limit overall government spending and act as a drag on growth later this year and early next.
On inflation, we expect to see progress over the coming quarters, but the path will be bumpy.In Q2 2023, we forecast a large decrease in the reported year-over-year PCE deflator due to base effects.Starting in Q3, rents, which are a significant contributor to faster inflation, are expected to cool.However, this does not mean the fight to tame inflation is over – far from it.
We expect year-over-year inflation readings to remain at about 3 percent at 2023 yearend and that the Fed’s 2 percent target will not be achieved until the end of 2024.
Labor market tightness will moderate somewhat over the coming quarters but will remain elevated relative to previous economic downturns, reflecting persistent labor shortages in some industries.This should prevent overall economic growth from slipping too deeply into contractionary territory and facilitate a rebound next year.
Due to stronger-than-expected consumer spending in early Q2 2023 we are delaying our recession call by one quarter.We now forecast that US GDP will expand by 0.6 percent (vs.-0.6 percent) in Q2 2023.
However, the headwinds to future growth persist and are somewhat augmented by lower government spending.
We now project that the US economy will grow by -1.2 percent in Q3 2023, -2.1 in Q4 2023, and -0.9 in Q1 2024.
Looking to 2024, we expect the volatility that dominated the US economy over the pandemic period to diminish.In the second half of 2024 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 back below 4 percent.However, due to an aging labor force we expect tightness in the labor market to remain an ongoing challenge for the foreseeable future.
June 06, 2023 | Publication
June 06, 2023 | China Center Publications.
