Major Challenges for the US Economy in 2024

Bye Bye 2023. Welcome, 2024! Fear of the Recession was always there in 2023. However, 2023 happened to be one of the Best of the Year for the economy. As the U.S. Economy witnessed robust economic growth, with inflation slowly moving towards the Federal Reserve’s target, Employment was strong, consumption expenditure acted as a savior for the economy as a whole. In other words, the economy showed its resilience in 2023. How it’s going to be in 2024? What are the challenges the U.S. Economy may have to face in the calendar year 2024? In this comprehensive analysis, titled “Major Challenges for the US Economy in 2024,” we are going to find some answers to these questions. Before delving into the answers it is important to know what the Federal Reserve has said on its Economic Projection in December 2023. Let’s get started.

The Federal Reserve’s Economic Projection

On 3^rd January 2024, the Federal Reserve released its Minutes of the Federal Open Market Committee, December 12-13, 2023. In the minutes the Federal Reserve has provided Staff economic outlook. In that Economic Outlook, it is stated that “The forecast for U.S. economic activity prepared by the staff for the December FOMC meeting was not as weak as the November projection. Recent data suggested that real GDP growth in the second half of 2022 was stronger than previously expected, but economic growth was still forecast to slow markedly in 2023 from its second-half pace.”

The minutes stated that the broad financial conditions seem to be less restrictive due to the higher path of equity values and a lower path for the dollar which is more than compensated by a higher medium-term trajectory for interest rates. Still, the Forecast of the real GDP growth of the U.S. through 2025 remains relatively low. The staff has lowered its outlook for potential output due to a less-than-expected trend in labor force participation. 

In the Minutes, the Staff also assumed that there would be a slower pace decline in the natural rate of unemployment in the near term. This is due to the recent estimates which suggested that job-matching efficiency is not increasing as quickly as expected.  Taking into account of these adjustments, the output was expected to fall short of the Staff’s estimate of potential by the end of 2024; this is a year later than in the previous forecast. And it will remain below potential in 2025. Similarly, the natural rate of unemployment was expected to move above the staff’s estimate by the end of 2024 and to remain above in 2025. 

The inflation projection has been revised down by the Staff. This is due to the lower-than-expected incoming data, including the November CPI as well as the Producer Price Index, and their assessment that inflation may be less consistent than earlier projections. Total Personal Consumption Expenditure (PCE) price inflation is expected to be slightly below 3 percent this year (i.e. 2024); whereas, the core PCE price inflation may be slightly above 3 percent. Inflation is expected to decline in the coming years. This will be due to a better alignment of demand and supply in the product as well as the labor market. By 2026, the Total, as well as PCE core inflation, are projected to be near 2 percent. 

Outlook for Monetary Policy

When it comes to the outlook for monetary policy, in 2024, the survey-based measures expected policy path continued to suggest a decline in the target interest rates – little changed from the path expected in the November Survey.  In contrast to this, the Market-implied path suggests that the target interest rates shift down by as much as 0.75 percent (i.e. ¾ percentage point) in 2024.

Will the US enter the Recession? – Major Challenges for the US Economy in 2024

As the Fear of Recession waned in 2023, there is a looming fear of the same in 2024. Few economists and Analysts claim, as they did in 2023, that the US will enter a recession in 2024. However, we first expect a soft landing now. But, that doesn’t mean that the U.S. economy doesn’t have any challenges. In fact, the U.S. economy has more challenges to face this year. Let’s now see the Challenges 

1. Real GDP Growth

Many Research firms, analysts, economists and even the Federal Reserve have stated that the Real GDP growth to slow down this year. This means the potential output may come down (or already down by this time), which will reflect in the final real output. The real GDP growth is anticipated to be less/ low for the next couple of years, i.e. till 2025. Therefore, to achieve a robust growth rate the potential output has to be increased/taken care of.

2. Federal Funds Rate and Time lag

The Federal Reserve is expected to cut the key interest rate – the Federal Funds Rate – in 2024. However, the timing of the interest rate cut is more important and to be watched out for. It should be always remembered that the effects of the interest rates, irrespective of an increase or decrease, are seen after a time lag (i.e. after a certain period). The time lag may vary from six months to one ½ years. So, the Federal Reserve will be (or has to be) cautious before getting into action for a rate cut. It has to be noted that the earlier increase in interest rates is already showing, though slowly, its effect on the economy.  

3. Labor Market

The labor market is going to be crucial for economic growth in 2024. Though the economy is witnessing a strong job market the job-matching efficiency is not increasing as quickly as expected. In simple, the sentiment in the job markets is weakening. 

4. PCE and Savings

As the PCE is increasing on the one side, which was the savior of the economy last year, the savings is reducing on the other. An increase in PCE means a decrease in savings. The Net Savings rate of the U.S. has reached -0.7 percent in Q3 of 2023 (as of 29^th November, 2023). It has to be remembered (as well as recollect) that whenever the Net Savings rate of the U.S. has gone negative (esp. like touching the -2 percent mark) then there will be a recession. Therefore, the policymakers should be well prepared and more aware of this lesson from the past. They should act accordingly. 

5. Other factors

Fiscal tightening to control fiscal deficit will be one of the biggest challenges this year for policymakers. Along with fiscal tightening, the mounting of overall debt has to be tackled effectively. Geo-political tensions, like war, are another leading factor which may affect the US economy. 

Our Perspective/Conclusion

The aforementioned are some of the major challenges which the policymakers should handle with care. In other words, as the U.S. steps into 2024, navigating potential economic challenges requires careful consideration of factors like GDP growth, interest rates, and fiscal policies. Policymakers must strike a balance to sustain economic growth, keeping an eye on the labor market and global dynamics. The strong personal consumption expenditure without a positive net savings rate may not last for too long and may land in the Recession. Fiscal prudence and timely interest rate cuts are going to be vital for the US economic growth for a resilient and prosperous year ahead. 

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