Bank Economists: Recession Risks Decline as Inflation Continues to Moderate

The U.S. economy is progressing along a soft-landing path, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee. Recession risks have diminished, inflation continues to moderate, and employment gains remain robust. A gentle easing cycle by the Federal Reserve will start around mid-year, facilitating trend-like GDP growth, according to the group.

The committee, composed of 16 chief economists from some of North America’s largest banks, sees real economic growth remaining healthy at around 1.7% for 2024 and 1.8% for 2025. Recession odds have diminished somewhat over the last six months, although policy and geopolitical risks keep them close to 30% both this year and next.

Following considerable progress over the past 18 months, the group expects inflation to continue gradually easing toward the Federal Reserve’s 2.0% target by the latter part of 2025. The committee’s forecast is that core personal consumption expenditures (PCE inflation), the Fed’s preferred indicator, will be 2.4% at the end of 2024 before reaching 2.1% by year-end 2025.

“Last year’s combination of resilient growth and moderating inflation is unusual historically and should be celebrated,” said Simona Mocuta, committee chair and chief economist at State Street Global Advisors. “The elements appear in place to extend a milder version of this in 2024, although we should not take this for granted. The risks to the outlook are two-sided but nuanced. The committee sees risks to the growth forecast as fairly balanced, but risks to the inflation forecast remain skewed to the upside.”

The bank chief economists see evidence of modest labor market softening, although this is merely a story of slower job growth rather than job losses. The pace of anticipated job creation is forecast to slow from over 139,000 per month in 2024 to just about 117,000 in 2025. The committee sees the unemployment rate reaching 4.1% by the end of 2024 and little changed thereafter – well within the range for a non-recessionary period. The committee sees upside risk to the employment and growth forecast stemming from new information on population growth.

The consensus view of the committee is that the Federal Reserve will begin cutting the target federal funds rate range in mid-2024, instituting three 25 basis point cuts before the end of this year.

“The committee believes that easing wage pressures and realized progress on inflation will allow the Fed to begin reducing the restrictiveness of its policy stance later this year,” said Mocuta.

Despite anticipated rate cuts, the committee expects credit quality to continue to deteriorate somewhat over the coming year as high interest rates lift debt service costs. However, sentiment around credit availability has improved at the margin relative to prior assessments. The forecast anticipates bank consumer delinquency rates to increase slightly from 2.8% in 2024 to 2.9% in 2025.

“While credit availability remains largely intact, the cumulative effect of still-high interest rates, softening demand, lower consumer savings and a mild uptick in unemployment will drive some deterioration in credit quality,” said Mocuta.

Housing construction has improved since the middle of last year and that momentum should continue in 2024, according to the committee. The committee forecasts housing starts to increase from 1.4 million in Q1 2024 to 1.5 million in Q4 2025. It also expects house price appreciation to be strong at the beginning of 2024 at 5.5% in Q1 2024, followed by a moderation of 2.0% annual growth for 2025.

“The good news is that the housing recession is over,” said Mocuta. “The not so good news is that a structural shortage of housing in the United States is keeping home prices elevated and affordability constrained.”

View detailed EAC forecast numbers.

The 2024 ABA Economic Advisory Committee includes:

• EAC Chair Simona Mocuta, managing director and chief economist, State Street Global Advisors, Boston;
• Bill Adams, senior vice president and chief economist, Comerica Bank, Dallas; 
• Scott Anderson, managing director and chief U.S. economist, BMO Capital Markets, San Francisco;
• Beth Ann Bovino, chief economist, U.S. Bank, New York;
• Ryan James Boyle, senior vice president and chief U.S. economist, Northern Trust, Chicago;
• Beata Caranci, senior vice president and chief economist, TD Bank Group, Toronto; 
• Augustine Faucher, senior vice president and chief economist, PNC Financial Services Group, Pittsburgh;
• Michael Gapen, managing director and chief economist, Bank of America, New York;
• 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 FHN Financial, New York;
• Richard Moody, senior vice president and chief economist, Regions Bank, Birmingham, Ala.;
• Olu Omodunbi, senior vice president and chief economist, Huntington National Bank, Columbus, Ohio;
• Luke Tilley, executive vice president and chief economist, M&T Bank/Wilmington Trust, Buffalo, N.Y.; and 
• Ellen Zentner, managing director and chief U.S. economist, Morgan Stanley, New York.