The much-predicted recession still hasn’t arrived. Will it materialize in 2024, at the worst possible moment for President Joe Biden, as he’s trying to convince voters to give him a second term?
It’s not looking that way. As economists roll out their forecasts for 2024, the prevailing theme is moderation: slowing but still-positive economic growth, a declining rate of inflation, and continued low unemployment.
“We do not expect recessions in most of the key economies of the world,” Goldman Sachs chief economist Jan Hatzius said during a recent briefing on the firm’s 2024 outlook. “A year ago, coming into 2023, we thought there was more of a risk. Some of that was the potential that we actually did need a recession in order to get inflation down. Now, I think that risk is largely behind us.”
Goldman puts the risk of a recession during the next year at 15%, which is roughly the historical risk of recession in any given year. That’s down from 35% recession odds coming into 2023. Goldman forecasts US GDP growth of 2.1% in 2024, just a tad slower than the 2.4% it expects for 2023, with inflation falling from the current 3.2% to around 2.5% — close to the Federal Reserve’s target of 2%.
Other forecasters are less bullish than Goldman, but most expect a benign combination of positive GDP growth and falling inflation. Oxford Economics, for instance, recently removed a mild recession from its 2024 forecast, because inflation has fallen rapidly since peaking in 2022, without harming employment. “While we no longer forecast a recession, we do expect a period of sustained below-trend growth throughout 2024,” Oxford wrote in a Nov. 20 analysis.
One reason for the fading recession risk is the economy’s outperformance in 2023. Around this time last year, a majority of economists surveyed by Bloomberg thought there would be a recession within 12 months. Bloomberg’s own forecasting model said there was a 100% chance of recession.
The reasoning was straightforward. The Federal Reserve was aggressively hiking interest rates to bring inflation down — and every prior time it did that, a recession occurred, as costlier borrowing dented spending and caused an economic contraction. The Fed even suggested it would tolerate a recession if that’s what it took to tame inflation.
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Economists respect historical precedent and are loath to say this time is different. But this time does seem different. Instead of a recession, the Fed seems increasingly likely to execute a “soft landing”: bringing inflation down without forcing unemployment up. American consumers surprised nearly everybody this year with their willingness to keep spending, even as COVID-era stimulus ran out and excess savings that piled up during the pandemic dwindled. Businesses have held on to workers, even with declining profits. Third quarter real GDP growth was a blockbuster 4.9% and growth for the year should be about 2 percentage points above the consensus forecast from a year ago.
Real income, adjusted for inflation, was negative for Biden’s first two years in office, which means inflation outpaced earnings growth and the typical family fell behind. But real income growth flipped to positive earlier this year and wages now seem to be growing enough to sustain modest spending growth. Surprises are always possible — war, another pandemic, an energy price shock — but the fundamentals are in place for a normalish economy in 2024.
That’s a necessary, but not sufficient, condition for Biden’s reelection.
Biden is relatively unpopular, with a weak 40% approval rating, and an even smaller portion of voters who approve of his handling of the economy. High inflation has been Biden’s biggest economic problem, but Biden’s approval rating has not improved as the inflation rate has dropped by nearly 6 percentage points. Voters seem scarred by the alarming price hikes of 2021 and 2022, and unwilling to forgive Biden or forget the damage done to their wallets.
The state of the economy three to six months prior to Election Day often determines whether an incumbent president earns reelection. Incumbents typically win if there’s no recession and lose if there is one. So by that logic, a solid economy next year should favor Biden’s reelection. Yet polls show him close with Donald Trump, his likely Republican challenger, and even losing in some swing states that will be pivotal to next year’s outcome.
Three things could happen. Voters could come around and start giving Biden more credit for a healthy economy. Or the economy could surprise to the downside, and enter the recession gloomy consumers think is on the way. Or the economy could continue growing, with inflation dropping, and the electorate could vote Biden out anyway.
Maybe this time really is different.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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