Brace for Slowdown This Year, Then a Rebound 

The U.S. economy will likely experience a significant growth slowdown—and possibly a mild recession—in the first half of 2024, but in subsequent months the downturn will wane, and growth will resume, eventually catching up to its potential in 2025. 

That’s AMG’s most likely scenario, or Base Case, for America’s economy, according to the new Three-Year (2024-2026) Economic Outlook. The AMG report contains seven distinct scenarios, ranging from optimistic to pessimistic, for clients to consider when rebalancing their portfolios. Here are the highlights of the “Slow Start” Base Case: 

• The slowdown is broad-based, with consumer spending and business and residential investment weak across the board. Sagging growth is caused by a combination of factors. First, the lagged effects of high interest rates curb business and residential investment. Second, the expiring economic stimulus measures, such as the CHIPS Act and the Inflation Reduction Act, put additional pressure on business investment. Finally, the exhaustion of excess savings accumulated by households following the pandemic, as well as the increase in household debt-service costs, limit the growth rate of consumer spending.  
• The labor market deteriorates a bit in the slowdown, but the unemployment rate likely does not exceed 5%. Total employment and the labor-force participation rate stay close to their current levels. However, as the number of job openings decreases and the number of unemployed people increases, the labor market loosens and comes closer to balance. This helps slow down wage growth to less than 4% and relieves inflationary pressure in the service sector. 
• Inflation continues falling thanks to slower economic growth and lower wage pressure. While inflation might prove somewhat stickier and fall more slowly than anticipated, the opening output gap and a moderate increase in unemployment will help the Federal Reserve (Fed) bring inflation down toward its desired 2% level. 

Interest rates fall later in 2024 as ebbing inflation and slowing economic growth allow the Fed to ease monetary policy. The central bank is likely to proceed cautiously at first, making sure that the disinflation process is sustained. If it is, the federal funds rate should settle at slightly above 3% sometime in 2025.