Solid economic momentum to start 2024 but headwinds remain

Current trends

Job and wage gains moderated over the course of 2023 but ended the year strong enough to continue bolstering household incomes. Consumers also tapped credit more freely, turbocharging spending at the end of the year and setting up a solid hand-off to early 2024. Business sector readings were more sluggish — with manufacturing stuck in contraction and services nearing it — as high interest rates and elevated labor costs weigh on bottom-line profits. Core inflation remains elevated, but the pace is still on an overall downward trend. This likely positions the Fed for a May or June rate cut. The rally in equity markets continued as the S&P 500 hit a record high in January.

 

Future outlook

While the economy still carries solid momentum into 2024, signs of weakness continue to build under the surface as restrictive monetary policy and tight credit conditions impact decisions by consumers and businesses. We expect hiring in many sectors to slow sharply by mid-year with more firms looking to cut expenses, resulting in a dimmer outlook for spending and an expected brief and mild recession. As services inflation is expected to remain sticky, interest rates should remain higher for longer with a delayed shift to policy easing by the Fed — reinforcing our belief that a recession remains more likely than a soft landing this year.