Recession 2024: Are We on the Brink of an Economic Downturn?

An old Wall Street joke is that experts have successfully predicted nine of the last five recessions. Predicting future U.S. economic performance is certainly a challenge due to the country's size and all the inputs necessary to make an educated guess: inflation rate, gross domestic product (GDP) growth, the labor market’s strength, the performance of the U.S. stock and bond markets and geopolitical risks, which have increased dramatically in October.

The prediction game is challenging, even for major business publications. Slightly over a year ago, an Economist article predicted that "a recession in America by 2024 looks likely." However, the article hedged that the recession will not be as severe as the downturns in from 2007 to 2009 and during the pandemic.

The article cited the high CPI, which was 8.3% higher in April 2022 than a year earlier. Even taking out food and energy prices, inflation was still 6.2%. The Economist noted the labor market's strength and remarked that the Federal Reserve Bank had indicated that it could lower inflation to its 2% inflation target without triggering a recession by raising interest rates.

Despite these negative predictions, “The economy is doing far better than even the most optimistic forecast last year predicted,” wrote Jon Ulin, CFP®, Managing Principal and Private Wealth Advisor at Ulin & Co. Wealth Management. Ulin writes, "Consumer spending has been stronger than expected while business and government spending have helped along the way. Whether this can continue is an open question, but in the worst-case recession has been postponed to 2024." Many economists report that gross domestic product may have expanded at a 4% or higher annual rate in the third quarter.

However, there are debates among economists and other experts if the Fed can achieve the much-discussed “soft landing.” The Fed has raised its benchmark interest rate 11 times since 2022, and it's now at a 22-year high range of 5.25% to 5.50%, significantly higher than the near-zero level during the pandemic.

On One Hand or On Another

For example, Goldman Sachs’ economists predict that there is now a 25% chance of recession in the next 12 months, compared to their projection of 35% shortly following the failure of Silicon Valley Bank in March. However Capital Economics is less bullish. The firm expects GDP growth to slow from 2.1% this year to 0.8% in 2024, with the economy "still likely to experience a near recession around the end of this year." The company predicts that core inflation should continue to fall to 2% by mid-2024, and the Fed will cut interest rates by 200 basis points.

Patrick Harker, president of the Federal Reserve Bank of Philadelphia and a voting member of the central bank’s policy committee, recently spoke at a meeting of the Mortgage Bankers Association in Philadelphia. He stated that the Fed should maintain interest rates at the current level and permit them to continue to slow the economy and keep inflation in check. Harker also said he was pleased that price increases have slowed in recent months.

The Fed’s preferred measure of inflation, The PCE price Index (personal consumption expenditures), rose 3.5% in August compared to a year earlier, down from its 7.1% peak in June 2022. However, it has not reached the Fed’s target of a 2% annual inflation rate.

New home buyers have felt the brunt of the higher rates because the average rate offered for a 30-year mortgage reached 7.57% on October 12. According to Freddie Mac, rates rose for the fifth consecutive week due to ongoing market and geopolitical uncertainty. Higher rates have also meant that homeowners with long-term mortgages at lower rates are now reluctant to sell their homes, which has helped keep the supply of homes relatively low.

Despite higher yields leading to higher mortgages and credit card rates, the overall economy is resilient with a robust labor market and no letup in consumer spending. In fact, interest rates are still relatively high, inflation is above the Fed’s target rate, many Americans have tapped out their pandemic savings and many college graduates will have to resume paying their student loan bills after a pause during the pandemic. Nevertheless, U.S. consumer spending is strong, according to the latest retail sales report.

Expenditures at stores, online and restaurants climbed a higher-than-expected 0.7% in September compared to a month earlier. The day the retail report was released on October 17, equities declined, and the yield on the benchmark 10-year bond added more than a 10th of a point to climb above 4.8% as investors fretted that interest rates would stay high for an extended period.

A Robust Labor Market

The labor market continues to outpace expectations. Employers hired an additional 336,000 workers in September, the best showing since January and up from August’s 227,000, according to the Labor Department. Job growth was also more robust in July than previously estimated. The unemployment rate stood pat at 3.8%. Wages grew by 5.3% in September.

Gerald Cohen, Chief Economist, Kenan Institute of Private Enterprise Research Professor at the University of North Carolina Kenan-Flagler Business School, wrote, "The labor market is the main driver of spending, and without a meaningful slowdown or outright decline it is hard to get a recession.” 

He still “anticipates a mild recession in 2024 as Fed rate hikes ripple through financial conditions and inflationary pressures weigh on consumers.” He adds that we are headed toward a recession due to the impact of inflation, higher interest rates, and stresses in the banking system. “But the impact of these have long and variable lags, which is why it is hard to predict economic outcomes and the timing of those outcomes.”

Vijay Marolia, Managing Partner and Chief Investment Officer of Regal Point Capital and founder of Dharma Investing LLC, notes that he is a bit skeptical about the strength of the job market. He wrote, "Although the Biden administration is bragging about the ‘strong’ employment numbers, a closer look reveals that most new jobs were low-paying part-time jobs and that real wages (adjusted for inflation) are not keeping up with the actual rise in the cost of living.”

Wall of Worry

Another worry is that the odds of a recession have increased “because many people must start paying student loan payments, and this is significant,” said Marolia. He also noted that consumer spending is already taking a hit. As a general theme, he anticipates “a difficult environment for the remainder of the year and the first quarter of 2024, but not a recession.”

Like Cohen, Kern Campbell, a Wealth Manager with Merit Financial Advisors, is concerned that rising interest rates are a concern for consumers who want to purchase “high-dollar items that require debt such as houses, cars, boats.” He also explained that high-interest rates will negatively impact commercial real estate economics, which is mostly structured with 5–7-year debt. “Going from 3% to 7% debt could significantly change the financial profile of real estate holdings,” he said.

In contrast, he stated that residential real estate may perform better because inventory will likely stay low as owners with a 3% mortgage are reluctant to sell, which should keep the inventory supply low (depending on the market). However, “commercial Real estate is likely to be a bigger issue.”

Kern has also noticed two other worrisome trends: Disposable income has been declining, which is impacting consumer spending power. He thinks that “consumers (and businesses) will continue to spend, but they will likely trade down to lower cost options.”

Signs of Higher Levels of Debt

There are some signs that consumers’ purchasing power may be slipping. For example, customers may be starting to ease up on discretionary purchases due to inflation and a rundown in savings. The personal saving rate, an indicator of the amount of money people have left each month after spending and taxes, dropped to 3.9% in August, down from the pandemic peak of 32% and about 5% earlier in 2023. 

In addition, delinquencies on some consumer debts are increasing. The percentage of credit card and auto-loan balances transitioning into serious delinquency—90 days late —increased in the second quarter of 2023 from a year earlier. Credit card delinquency increased to 5.08% in 2023’s second quarter from 3.35% a year earlier, and auto loans’ delinquency increased to 2.41% in the second quarter versus 1.81% a year earlier.

According to the Federal Reserve Bank of New York’s Center for Microeconomic Data’s Quarterly Report on Household Debt and Credit, total household debt reached $17.06 trillion in 2023's second quarter, while credit card debt exceeded $1 trillion.

Total debt rose by $16 billion or 0.1%. Credit card balances increased $45 billion, or 4.6%, from $986 billion in the first quarter of 2023 to $1.03 trillion in 2023’s second quarter. Credit card accounts rose by 5.48 million to 578.35 million, with aggregate limits on credit card accounts rising by $9 billion to $4.6 trillion.

Most economists are not overly concerned about higher delinquency rates. However, they keep an eye on the data because they can be an early warning sign or a harbinger of consumer financial distress.

Ilir Salihi is the founder and senior editor of IncomeInsider.org. You can read more of his content on the IncomeInsider blog.