While the prospects for a ‘soft landing’ have risen, The Conference Board believes it is more probable that the US economy will slip into a short and shallow recession in early 2024. While consumer spending has held up in recent months, income gains have not kept pace. Rising debt levels and declining savings have underpinned consumption. This is not sustainable in our view. US labor markets remain tight given a strong September jobs report and large upward revisions for July and August. As the economy cools in early 2024 so too will the labor market. On inflation, progress is being made, but the outbreak of war in the Middle East amplifies energy price risks. We expect one final 25 bps hike by yearend, but no cuts until mid-2024

Global real GDP is forecasted to grow by 2.7 percent in 2023, down from 3.3 percent in 2022. We expect further slowing to 2.4 percent in 2024. Economic growth is moderating under the weight of still high inflation and monetary policy tightening. Rather than a global recession, we expect a relatively subdued economic outlook. Growth is generally strongest in emerging Asian economies, and weakest in Europe and the US.

Rapid monetary policy tightening over the last year or so led to weakening in global housing, bank lending, and the industrial sector. However, this weakness has been more than offset by strength in other sectors, most notably service-sector activities, which is visible in labor markets. Strong consumer spending and the fading impact of shocks of recent years have been difficult to assess, leading to ongoing forecast revisions. Nonetheless, recent data  point to moderation of these positive trends, leading to slower global growth in the second half of 2023 and early 2024.

Two key risks stand out regarding the global economic outlook. The first relates to inflation. While headline inflation has peaked in most economies, core inflation (excluding volatile items such as food and energy) has proven stickier and has not decisively peaked in many economies. Price pressures in the (global) goods and industrial sectors have receded, and if history is any guide, services prices should likewise moderate over the next quarters. However, the speed of this disinflationary process is hard to assess and will depend on a number of factors including weakening demand and pricing power of firms, labor market dynamics, and passthrough from past input price increases. The second risk relates to financial market stability. Central banks tightened monetary policy rapidly and this exposed weaknesses in the banking sector, and financial markets in general. While most indicators point to relative stability in global financial markets, long and variable lags in the passthrough of monetary policy mean more financial turmoil could be on the horizon.

Apart from country-specific deviations, such as a possible rebound in US GDP in 2025, business would do well to prepare for a slowing global economic growth environment over the next decade. Relatively slow growth of about 2.5 percent for 2023-2024 for the global economy reflects the ongoing pivot to a more modest global GDP growth environment for the next decade, which is estimated at around 2.6 percent, down from an average annual pace of 3.3 percent in the decade leading up to the pandemic.

The 10-year economic outlook signals a prolonged period of disruptions and uncertainties for businesses, but there are also opportunities. Global growth will return to its slowing trajectory with mature markets making smaller contributions to global GDP over the next decade. Nonetheless, there are still opportunities for firms to invest in both mature markets—given their wealth and need for innovation to compensate for shrinking labor forces—and emerging markets—given their need for both physical and digital infrastructure to support their sizable and young labor forces. Keys to ensuring growth over the longer term include developing new lines of business; strengthening corporate culture; embracing digital transformation and automation; recruiting for talent with new skills not currently represented in the company; and maximizing the hybrid work model where it makes sense.

The Conference Board forecasts that US economic growth will buckle under mounting headwinds early next year, leading to a very short and shallow recession. This outlook is associated with numerous factors, including, elevated inflation, high interest rates, dissipating pandemic savings, rising consumer debt, lower government spending, and the resumption of mandatory student loan repayments. We forecast that real GDP will grow by 2.2 percent in 2023, and then fall to 0.8 percent in 2024.

US consumer spending has held up remarkably well this year despite elevated inflation and higher interest rates. However, this trend cannot hold, in our view. Real disposable personal income growth is flat, pandemic savings are dwindling, and household debt is rising. Additionally, new student loan repayment requirements will begin to impact many consumers starting in October. Thus, we forecast that overall consumer spending growth will slow towards yearend and then contract in Q1 2024 and Q2 2024. As inflation and interest rates abate later in 2024, we expect consumption to begin to expand once more.

Meanwhile, following weak growth in Q1 2023, business investment bounced back in Q2 2023 despite interest rate increases. This was largely due to a surge in business spending on equipment (especially computing and transportation equipment) and elevated investment in structures (especially in manufacturing). However, we expect this trend to gradually reverse as US consumption begins to soften and interest rates continue to rise (we believe the Fed will raise rates by 25 basis points once more this year, likely in November). Residential investment, which has already contracted significantly, should start to bottom out later this year and then rise on lower interest rates and strong demand in 2024.

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 probably be bumpy. Energy prices have been rising in recent weeks and will likely rise further on the back on conflict in the Middle East. However, progress in rental prices, which were previously a significant contributor to inflation, are beginning to cool inflation data. 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 has been remarkably persistent but we expect it to moderate somewhat over the coming quarters. However, relative to previous economic downturns we expect the labor market to hold up well due to persistent shortages in some industries and labor hoarding in others. This should prevent overall economic growth from slipping too deeply into contractionary territory and facilitate a rebound next year.

Looking into late 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 lower rates to near 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.

Press Release
Tuesday, October 31, 2023

The Conference Board Consumer Confidence Index® declined moderately in October to 102.6 (1985=100), down from an upwardly revised 104.3 in September. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—declined to 143.1 (1985=100) from 146.2. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—fell slightly to 75.6 (1985=100) in October, after declining to 76.4 in September. The Expectations index is still below 80—the level that historically signals a recession within the next year. Consumer fears of an impending recession remain elevated, consistent with the short and shallow economic contraction we anticipate for the first half of 2024.

“Consumer confidence fell again in October 2023, marking three consecutive months of decline,” saidDana Peterson, Chief Economist at The Conference Board. “October’s retreat reflected pullbacks in both the Present Situation and Expectations Index. Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular. Consumers also expressed concerns about the political situation and higher interest rates. Worries around war/conflicts also rose, amid the recent turmoil in the Middle East. The decline in consumer confidence was evident across householders aged 35 and up, and not limited to any one income group.”