2023 has not been kind to the pessimists who shape the public’s perception of the U.S. economy. Despite a widely predicted “inevitable” recession, the resilient U.S. economy forced growth forecast to be revised higher and higher by a staggering 2 percentage points as the year nears its end. Similarly, consensus odds of a U.S. recession were far too negative, remaining at 65% for most of the year, but the economy never came close to one as the labor market went from strength to strength.
Now, remarkably, those who bet on pessimism are doubling down for 2024. Consensus growth forecast remains at a sluggish 1.2% (below where they were a year ago) and recession odds are seen at 50%.
Is this a case of incorrigible pessimism? Or is there merit in the idea that 2023’s outperformance was not grounded in fundamental strengths but rather a lucky fluke of demand pulled forward–a recession delayed, not averted?
We think there is too much pessimism, and we see reason to double down on our own far more optimistic stance we’ve held for over a year. Yes, growth next year will be modest and that comes with vulnerabilities and risks. But to deny that the fundamental strengths of 2023 can persist, and to look past the significant easing of inflation (itself once cast as a structural runaway problem), strikes us as recalcitrant pessimism. Dour economic predictions are in keeping with the discipline’s tradition, but we should remind ourselves that for every true crisis, there are many false alarms.
The curious denial of the ‘soft landing’
Despite the economy’s strength, there remains a reluctance to recognize a soft landing. The idea that inflation could fall and the labor market ease graciously in the face of the Fed’s blistering series of rate hikes was flatly dismissed earlier this year. Skeptics such as Larry Summers said it would take 5 years of 6% unemployment to bring inflation down, and that a soft landing was “at odds” with theory and empirics.
In fact, we are over a year and a half into a soft landing. Inflation has fallen 6 percentage points, the labor market has cooled significantly as seen in 3.3 million fewer job openings as employers filled roles and removed job postings. Historically, a significant decline in job openings has meant a significant rise in the unemployment rate–a key argument of those predicting a recession. However, the unemployment rate has remained near its multi-decade low.
That doesn’t mean the soft landing will persist–but it can. Pessimists like to point to the level of interest rates, that their bite is waiting to take hold, and that inflation will prove stubborn. That’s all possible–but it should be recognized that the challenges of 2023 were more significant than the challenges expected in 2024. Inflation was far higher and policy rates continued to move sharply higher throughout 2023. In contrast, 2024 looks likely to deliver inflation closer to the policy target of 2% and, eventually, enable rate cuts.
That looks more like the third stage of a soft landing than the lingering question if there will be one. Framing a soft landing as a perpetual expansion is moving the goalposts. Of course, there will always be a “next recession.” But the fact remains that the economy has survived stage 1 of the soft landing (rapidly rising rates) and looks set to survive stage 2 (a period when rates are restrictive). The successful completion of a third stage is about continued growth as interest rates normalize towards neutral levels. That is far from impossible.
'Running out' of resilience?
Faced with consumers’ remarkable resilience this year, many doomsayers ascribed it to excess savings, amassed during the pandemic, that would inevitably run out. In this telling, consumer spending, which represents around 70% of U.S. GDP, was approaching the cliff edge in 2023. But the fall never happened–and the pessimists have quietly moved the cliff edge into 2024.
But thinking of resilience as a depletable stock has serious flaws. It is also about regenerative flows. Household savings are not like a shoebox stuffed with cash that is being spent down. For that, the (aggregate) savings rate would have to be negative. Today, while the savings rate may be low, it is positive at 3.8%.
And there is a good reason for the savings rate to be low: household wealth is near record highs. When wealth is high, households save less (and vice versa). The savings rate today is not unusual relative to these extraordinarily strong wealth levels. Of course, the aggregates hide the distribution of individual excess savings and it is reasonable to expect their gradual disappearance to be slowing growth–but it is less reasonable to see it as a sudden stop.
The risk, then, is not that consumers would collectively run out of money because they were dissaving. Rather, the risk is that they start saving more and therefore spending less. Yet, we find it hard to believe that self-directed household austerity will occur on a timeline and with an intensity that spells a 2024 recession. Remember the strength of the labor market: employment is still growing and so is total compensation.
Critically, 2024 will also see growing sources of resilience. Inflation is now lower than wage growth, delivering real wage growth (tight labor markets also tend to benefit the lower-income segments of the labor market most). This effect can outweigh the drag from unwinding excess savings. Yes, stocks matter, but so do flows. As 2023 began, real wages were falling (inflation was higher than wage growth) but extraordinary levels of hiring offset that (new paychecks). In 2024, hiring will be more modest, but rising real wage growth will matter more.
The hard edges of the soft landing
Resilience notwithstanding, the soft landing comes with hard edges. Many parts of the economy have been hurting. This need not be contradictory: The aggregate and the components don’t have to agree. In fact, in recent years the components have been more divergent than in any expansion on record.
The consumption of physical goods has seen a significant slowdown (albeit measured against the exalted peaks of the post-pandemic overshoot). Meanwhile, services, which are roughly twice the size of goods consumption, are still growing their way back to their pre-pandemic trend. That diversification has driven aggregate resilience–even if that coexists with pain in many parts of the economy.
And the soft landing comes with additional hard edges. The flipside of declining inflation (an aggregate measure) means waning pricing power for the firms making up the economy. Inflation wasn’t a structural regime shift–it was a brutal mismatch of (too much) demand and (too little) supply. All firms could raise prices without losing market share. But as demand and supply normalized, pricing power waned because firms returned to protecting and fighting for market share. That also feeds through to margins and profits. Profits had grown by strong double digits, so negative profit growth (even if the level of profit was historically strong) feels like a failure.
While these hard edges are largely being digested, others are more persistent: Higher interest rates that have pushed up borrowing costs for households and firms are likely to stay relatively high. Even with rate cuts on the horizon, interest rates will be far higher in 2024 than we were used to before the pandemic. In fact, barring a recession, they will remain far above recent perceptions of “neutral” (around 2.5%).
That will continue to drive pain for some households (think mortgage rates above 7%) and for firms, where bankruptcies are on the rise. But we must not extrapolate carelessly from these headwinds. Remember, the purpose of rising rates was to slow down the economy. Less activity is the point. Even higher bankruptcies are an intended outcome: more expensive capital will nudge toward better allocation of resources (including labor). And though bankruptcies in the U.S. are up, they are so from record-low levels and nowhere near distress levels today.
The next recession is always on its way
The pessimists are right in one way: There will be another recession. Over a long enough period, that prediction will eventually be fulfilled. Yet whether it arrives in 2024 is far from certain, and in our view, less likely than continued growth.
Additionally, thinking of the odds of a recession is less helpful than thinking of its type. Recessions come in three flavors. First, the so-called “policy error” where central banks push up rates too fast too far and the economy cracks. And while that risk remains, the worst is clearly behind us. Second, financial recessions occur when the banking system is in crisis and credit stops flowing to the economy. The collapse of Silicon Valley Bank last spring was a powerful reminder of the myriad and opaque risks the financial system harbors–but it was also a reminder of what forceful policy can achieve.
That leaves the third type of recession–when shocks or bursting real investment bubbles end the cycle. With growth slow, this certainly can’t be ruled out in 2024, but there is little reason to make it the base case. We are doubling down on economic optimism in 2024.
Philipp Carlsson-Szlezak is a managing director and partner in BCG’s New York office and the firm’s global chief economist. Paul Swartz is a director and senior economist at the BCG Henderson Institute in New York.
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