Bank Economists: “Soft Landing” Odds Have Improved But Recession Risks Remain

Despite an expected loss of momentum in U.S. economic growth over the next few quarters, the U.S. economy is likely to dodge a recession, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee.

The committee, composed of 14 chief economists from some of North America’s largest banks, sees real economic growth slowing from 2.1% annualized during the first three quarters of 2023 to less than 1.0% annualized over the following three quarters. Momentum then improves slightly in the latter part of 2024, although the pace of activity remains below potential, according to the committee.

While the median committee forecast does not include any quarterly contractions, considerable concerns about a mild recession remain. Recession risks center primarily around the delayed impact of monetary tightening, deteriorating credit availability, and high credit costs, but also include event risks such as a prolonged government shutdown or renewed flaring of geopolitical tensions. The group consensus is that near-term recession risks have come down but are still significant for 2024, approaching 50%.

Consistent with slowing growth, the group expects various measures of inflation to ease close to the Federal Reserve’s target. The committee’s forecast is that consumer inflation will decline from around 4% annualized over 2023 to just above 2% in 2024.

“The odds of the Fed achieving a soft landing look much better today than they did six months ago,” said Simona Mocuta, committee chair and chief economist at State Street Global Advisors. “However, the battle against inflation is not yet won, so the Fed must remain vigilant. At the same time, there is a better balance between supply and demand across the board, in goods, services and labor markets. This helps the ongoing disinflation process.”

The group noted that household spending has been supported by robust employment gains and an improvement in real disposable income. However, this resilience will fade amid the high cost of credit, the exhaustion of excess savings and weaker job growth.

Business investment is also set to slow, although pockets of strength exist, particularly in areas of the economy benefitting from government policy initiatives such as chips and EV manufacturing. Businesses have been preparing for a general economic slowdown by reducing inventory accumulation and hiring. Profit margins are expected to remain under pressure from rising labor costs, tightening credit availability and diminishing pricing power.

Bank chief economists see evidence of modest labor market easing. The pace of anticipated job creation slows from over 200,000 per month in 2023 to just about 70,000 in 2024. Wage inflation—currently too high to be consistent with the 2.0% inflation target—moderates further as a result.  The committee sees the unemployment rate rising to 4.4% by the end of 2024.

The consensus view of the committee is that the Federal Reserve will leave the target federal funds rate range unchanged until next May, then reduce it by 100 basis points before the end of 2024.

“Given both demonstrated and anticipated progress on inflation, the majority of the committee members believe that the Fed’s tightening cycle has run its course,” said Mocuta.

The committee expects 10-year Treasury yields to slip back from over 4% at present to near 3.6% at the end of next year, and 30-year mortgage rates to retreat from near 8% to near 6% over the same period.

Following six consecutive quarterly declines, the committee sees residential investment bottoming out and improving slightly through 2024. However, the group foresees a modest correction in home prices on a national average basis until the fourth quarter of 2024, when prices will begin to recover.

“After a dramatic decline, things have stabilized in housing,” said Mocuta. “Despite high mortgage rates, the demand is there.”

View detailed EAC forecast numbers.

The 2023 ABA Economic Advisory Committee includes:

EAC Chair Simona Mocuta, chief economist, State Street Global Advisors, Boston;

Bill Adams, SVP and chief economist, Comerica Bank, Dallas;

Scott Anderson, managing director and chief U.S. economist, BMO, San Francisco;

Beth Ann Bovino, chief economist, U.S. Bank, Brooklyn, N.Y.;

Beata Caranci, SVP and chief economist, TD Bank Group, Toronto;

Augustine Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh;

Peter Hooper, managing director and vice chair of research, Deutsche Bank, New York;

Tendayi Kapfidze, managing director and chief corporate economist, Wells Fargo & Co., New York;

Bruce Kasman, managing director and chief economist, JPMorgan Chase & Co., New York;

Christopher Low, chief economist, First Horizon National Corp’s FTN Financial, New York;

Richard Moody, SVP and chief economist, Regions Bank, Birmingham, Ala.;

Carl Tannenbaum, EVP and chief economist, The Northern Trust Company, Chicago;

Luke Tilley, executive vice president and chief economist, Wilmington Trust Investment Advisors, Wayne, Pa.; and

Ellen Zentner, managing director and chief U.S. economist, Morgan Stanley, New York.