Economic Forecast to 2024: Recession now unlikely

A 2024 recession probably won't be a recession, though it's certainly possible. I had previously predicted a mild recession beginning in late 2023 or early 2024. This forecast backs away from that prediction. An economic outlook helps understand why a recession doesn't develop.

The typical time lag between changes in monetary policy and changes in the economy as a whole—spending, output, and employment—is about a year. But regressions can be long or short, and each episode is unique. There are no cookie cutter business cycles.

Reasons why a recession is delayed

Four factors explain the long-term lag in the negative effects of Federal Reserve tightening. First, automobile and light truck sales generally decline when interest rates rise, leading to cutbacks in production. During this time, demand for new cars was high due to past supply chain problems. In 2023, cars became more available and prices dropped slightly. But demand is so insatiable that sales are expected to slow in 2024. It is exacerbated by a mismatch between production and demand for electric vehicles.

A second delay comes from business capital spending, which typically declines when the central bank tightens. Part of the decline results from the high cost of capital, and part results from weaker expectations of future demand. However, in this cycle, companies placed orders for computers, equipment, and machinery to compensate for workers they had trouble hiring.

A third delay is related to the tight labor market. Some people who were laid off found new jobs after months of „need help” symptoms. This is not true for all displaced people, but true enough to delay reductions in consumer spending.

A fourth delay came from people who had been laid off or worried about layoffs. The public typically saved their pandemic stimulus payments, held onto them for a year, and then gradually spent their bank balances. They don't have to cut back on their discretionary spending as in a typical business cycle. Households will run out of pandemic savings by mid-2024, but they will have regular savings in the last few years.

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Most of these four factors are completely delayed, although the capital expenditure element may eventually soften the decline. Best economic policy in textbook theory adds stimulus when the economy is weak. Consumer savings are spent, especially, when the economy is weak. The same is true of the automobile sales cycle and business capital expenditures—they happen at the right time, so the peak is reduced slightly and then the valley is filled.

Leading indicators are mostly green

Currently (December 2023) the economy continues to grow and leading indicators are mostly positive. No single statistical measure does a perfect job of predicting the path of the economy I explained In the past. But taking them together can help us anticipate the future.

Yield curve inversion is one of the best leading indicators, measuring whether short-term interest rates are higher than long-term rates. Two common patterns show reversals: the federal funds rate exceeds the 10-year Treasury bond rate and the 2-year Treasury exceeds the 10-year rate. This is now a strong negative.

Initial claims for unemployment insurance do a better job of anticipating economic changes than most indicators. For the past two years, claims have been almost completely flat, well below the long-term average. There is no sign of a slowdown here, as jobs are generally plentiful. (Some industries are struggling, but not enough to create an economy-wide problem.)

The stock market often falls before a recession — but it falls at other times. Recent stock market results (till late December 2023) indicate good times ahead, not bad.

Another leading indicator that has been useful in the past is manufacturing purchasing managers reporting faster delivery times (available from Supply Management Company) that move is still favorable from an economic perspective. This may be less important as the economy has shifted away from a heavy reliance on manufacturing.

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Reasons to Expect a Recession in 2024

Despite generally positive leading indicators, the sharp increase in interest rates (and reduction in the money supply) we've had over the past two years could still trigger a recession. Growth will be positive but below the long-term average. Unemployment will rise slightly, but not too much. Inflation will continue to fall below the Federal Reserve's two percent target.

The central bank does not feel strongly about cutting interest rates, although they have stopped short of thinking about further increases. They may bring short-term interest rates to neutral by mid-2024. Their logic would be that they do not need to adopt easy monetary policy, but they should not continue their past tight monetary practices.

The economy faces risks, with geo-political concerns topping the list. Israel's war shows Iran's efforts to weaken US allies, including Ukraine. Chinese pressure on Taiwan also warrants concern. If Venezuela invades the country's oil fields, the US may be drawn to support Guyana, leaving us vulnerable to other challenges.

Here at home, bipartisan spending sprees threaten our financial system, though the crisis is probably far from over. And with it the usual animal spirits—people get scared, hold on to their money and companies become pessimistic about the value of capital expenditure.

Many of us economists have predicted a recession, and while it may not materialize right away, that doesn't mean a recession is impossible. Although we dodged that bullet, contingency plans for alternative economic situations are always good business policy.

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