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Finding the signal amid noisy data. While the US economy entered 2024 with solid momentum, noisy economic data at the start of the year has made the outlook more difficult to assess. We believe the inflation picture is likely not as hot as the latest Consumer Price Index (CPI) and Produce Price Index (PPI) reports suggest while the labor market picture is not as rosy as painted by the strong January jobs report. But neither is the state of housing, consumer spending and industrial production as weak as the January data indicates.
Outlook: Our view remains that a soft landing is likely as economic conditions gently cool, and inflation gradually reverts to the Fed’s 2% target. Consumers will show more caution with their outlays as “cost fatigue” gradually curbs their willingness to spend but ongoing disinflation should support positive real household income growth. And business leaders will continue to exercise more scrutiny with their investment and hiring decisions amid still-elevated interest rates and softer final demand growth. They will also look to drive stronger productivity growth via more efficient production, organization processes and the integration of generative AI (GenAI). We now see the US economy growing 2.2% in 2024, partly reflecting the strong carry-over from 2023, following real GDP growth of 2.5% last year.
Labor market enduring strength. The labor market started the year on a very strong note, with the economy adding 353k jobs in January and the unemployment rate remaining steady at 3.7% while wage growth reaccelerated. While the hiring strength was overstated due to large positive seasonal adjustments, the report indicated that the labor market remains on solid ground. Yet, we continue to anticipate a mild softening of labor demand in the coming months. This will mostly come in the form of reduced hiring, strategic resizing decisions and wage growth compression. We see the unemployment rate rising toward 4.2% by year-end.
Consumers take a breather. The January retail sales report showed a larger-than-expected pullback in spending in January as consumers took a breather after the holiday shopping season. We continue to expect a solid consumer spending performance in 2024, but momentum will be a little more subdued than the robust 2.2% advance in 2023. Indeed, softer employment conditions will translate into more modest income momentum, while cost fatigue weighs on consumer wallets in the early part of the year. We project that consumer spending will grow around 2% in 2024.
Bumpy disinflation. Consumer price inflation showed some notable stickiness in January as headline inflation cooled less than expected to 3.1% year over year (y/y). And core CPI inflation remained disappointingly steady at 3.9% y/y — its slowest pace since May 2021. Looking ahead, disinflationary impulses from cooling economic momentum, reduced pricing power, continued labor market rebalancing and receding shelter cost inflation will help further ease inflation pressures this year. We foresee headline and core CPI inflation around 2.1% y/y in Q4 2024 barring any significant geopolitical, commodity price or recessionary shocks. The Fed’s favored inflation gauge, the deflator for core personal consumption expenditures, will reach the critical 2.5% y/y threshold in early 2024 — within striking distance of the 2% target.
A careful Fed. The Fed kept the federal funds rate unchanged at 5.25%–5.50% at the January Federal Open Market Committee (FOMC) meeting and dropped its tightening bias in the policy statement. However, Fed Chair Jerome Powell stressed that the Committee would need more “good” disinflation evidence over the coming months in assessing when to start easing policy. Our long-standing view has been that the Fed would start cutting rates in May, but recent upside surprises in economic and inflation data increase the odds of a June onset. We still expect a total of 100 basis points (bps) of rates cuts this year.
Risks to watch for: We see two prominent downside risks heading into 2024. The first risk is stems from an inflation flare-up and collapsing economic activity. This risk features prominently in a context where geopolitical tensions remain elevated, fragmentation has become a reality and supply shortages, a close memory, return. The second risk is that monetary policy remains overly restrictive against a slower growth backdrop, leading to tighter financial conditions and private sector activity retrenching. On the upside, non-inflationary growth supported by a robust labor market, consumer resilience and stronger productivity growth from efficiency improvements and technological innovations would represent the ideal scenario coming out of this unique pandemic shock.
The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
Inclusive leader. Passionate about how economics can help organizations navigate an uncertain world. Husband and dad. Judo black belt, competitive triathlete and avid traveler.
Focused on guiding leaders and organizations through economic changes. Avid traveler raising global citizens.
Translator of “macro to micro.” Economist dedicated to providing insights to clients on how macroeconomic trends affect their organizations. Squash enthusiast and coffee lover.
