The U.S. economy will witness slowing inflation and sluggish economic growth over the next year, the Congressional Budget Office (CBO) said in its latest 2023–2025 review. If accurate, the United States will have achieved the widely hoped-for soft landing narrative—averting a recession while tackling inflation and keeping the labor market intact.
Many economists agree with the CBO’s latest assessment.
Economic projections from the nonpartisan budget watchdog show that output growth is expected to slow in 2024, with real GDP tumbling from 2.5 percent in 2023 to 1.5 percent in 2024. This downward trend, the report says, will be driven by weakness in consumer spending and contracting nonresidential private investment.
Conditions are projected to rebound in 2025 as the real GDP growth rate tops 2 percent, supported by lower interest and improved financial circumstances.
Last week, the Federal Reserve signaled that it would cut interest rates three times in 2024 and two times in 2025. Over the past year, Fed Chair Jerome Powell has discussed the need for the U.S. economy to experience below-trend growth to prevent the resuscitation of inflationary pressures.
“It makes it more difficult for us to achieve our goals. And if you have growth, it’s robust,” the Fed chief told reporters at the post-Federal Open Market Committee (FOMC) policy meeting press conference on Dec. 13. “It will keep the labor market very strong and probably will place some upward pressure on inflation. That could mean that it takes longer to get to 2 percent and keep rates higher for longer.”
On the labor front, payroll levels are anticipated to soften next year as the unemployment rate grows from 3.9 percent in the fourth quarter of 2023 to 4.4 percent by the end of 2024, the CBO projected. The jobless figure is also predicted to remain around this level in 2025. The labor force is anticipated to rebound in the coming year “with an increased contribution to that growth stemming from projected immigration over the next two years.”
According to the U.S. central bank’s summary of economic projections, policymakers will not reach their 2 percent target until 2026. This is in line with the CBO forecasts that show inflation will slow but fail to stay at or below 2 percent over the next two years.
The Fed’s preferred personal consumption expenditures (PCE) price index is seen touching 1.9 percent in the first quarter and then staying slightly above 2 percent in the subsequent quarters. The consumer price index (CPI) is also projected to remain higher than the Fed’s 2 percent target heading into 2025. Core PCE and core CPI, which strip the volatile energy and food sectors, are projected to be 2.5 percent in 2024.
What Others Are Expecting
Heading into the fresh calendar year, a wide range of economic forecasts have been published, and many outlooks are similar to the CBO’s latest review.The Conference Board has predicted that elevated inflation, higher interest rates, the exhaustion of pandemic-era savings, growing debt, and the resumption of mandatory student loan repayments will significantly hamper growth next year.
“While we forecast that real GDP will grow by 2.4 percent in 2023, we expect it to slow to 0.9 percent in 2024,” Erik Lundh, principal economist at The Conference Board, said in the report. “However, following this downturn the U.S. economy should begin to normalize. We forecast 2025 GDP growth to come in near potential at 1.7 percent.”
Goldman Sachs economists have predicted that the country will defy consensus expectations in 2024, projecting the GDP growth rate will be above 2 percent. The consensus put together by Bloomberg pencils in 1 percent for the year. Looking ahead, Goldman Sachs outlined the main factors affecting the economic landscape: strong consumer spending, slower business investment, weak existing home sales, flat government spending, and depressed exports and easing imports.
“It was fair to wonder last year whether labor market overheating and an at times unsettling high inflation mindset could be reversed painlessly,” David Mericle, Goldman Sachs Research chief U.S. economist, wrote in the bank’s 2024 economic outlook. “But these problems now look largely solved, the conditions for inflation to return to target are in place, and the heaviest blows from monetary and fiscal tightening are well behind us.”
However, JPMorgan Chase has said the U.S. economy will “walk the line between a slight expansion and contraction for much of next year, also known as a soft landing.”
The bank economists forecast a below-trend pace of 0.7 percent in 2024.
Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, argued that the Fed’s policy rate decisions might play a significant role in the outlook for next year.
“Either the U.S. economy will do fine, and the Fed won’t start cutting rates in March or we will see a sharp slowdown in the U.S. growth, and a potentially deteriorating growth outlook will force the Fed to start cutting the rates in Q1 and cut thoroughly,” she said in a research note.
Meanwhile, in the year’s final quarter, the Federal Reserve Bank of Atlanta’s GDPNow model estimate suggests 2.6 percent growth, up from as low as 1.2 percent earlier this month.
