Is it finally time to shelve recession fears?
Of the US economy's three options — soft landing, recession or reacceleration — the first seems the most likely.
As we go into 2024, financial markets are focused on one question: Are we going to have a recession because rates are so high, or will we achieve a soft landing?
Of course, that question is heavily intertwined with other questions: Will there be more layoffs in 2024? Will inflation keep dropping toward 2% — and stay down? Will U.S. consumers remain resilient despite larger credit card balances and dwindling savings? What will happen in the equity and bond markets?
Armed with a broad set of data, our team keeps tabs on the domestic and global economic indicators. And so as we go into the year ahead, here is some of what we’ll be watching closely:
DOMESTIC INFLATION
Although inflation doesn’t have to hit the Federal Reserve’s 2% target in 2024, it must keep trending downward toward that figure, which would be the ideal outcome. If it doesn’t, then the Fed at the least might have to hold rates at the currently high level for longer. This lowers the possibility of the U.S. economy achieving a soft landing and we could have a recession. Of course, there’s also a third possible scenario: The economy could reaccelerate from an increase in consumer spending such as retail sales.
Of those three options — soft landing, recession or reacceleration — the first seems the most likely. Although there are some potential ingredients for recession in the current economic cycle, many of them haven’t materialized yet. For example, mortgage rates have moved higher, but most existing homeowners are in fixed mortgages at lower rates, so they haven’t felt the impact of higher mortgage rates. The same thing is happening with large corporations’ debt. Their debt servicing costs are still averaging only 4% because much of their debt is locked in at these lower rates. At the same time, higher interest rates on credit card debt, continued inflation and the overall high cost of living are eating into households’ overall income, so a reacceleration of the economy is also less likely than a soft landing.
THE LABOR MARKET
We are closely monitoring jobs data to determine whether the Federal Reserve’s rate hikes are adequately slowing the economy to bring down inflation or, alternatively, if the economy is slowing too much.
Increased weekly jobless claims are usually the first indicator that the economy is really slowing, so we’ll be watching those figures closely along with layoff announcements reported by corporations. These announcements give leading indicators of whether there’s broad-based weakness in the economy. We don’t think that this weakness will occur; nevertheless, it is clearly a concern as we consider the state of the economy in 2024.
THE BOND MARKET, INCLUDE SPREADS
Overall, we expect the bond market to perform positively in 2024, based on the assumptions that the Fed will either keep rates stable or cut them slightly in the second half of the year.
Meanwhile, throughout the year, one of the factors we’ll be watching closely is the credit spread between 10-year Treasury bonds and 10-year corporate bonds. If they have the same maturity date, a corporate bond will usually give a greater yield than a Treasury bond because of the credit risk associated with the corporation. If the economy falters and there are concerns about companies repaying their debt, that spread will expand, but if the economy is doing well, then the spread will contract.
Of course, when it comes to the economy, no single number is a crystal ball into the future, but watching this data and others can help navigate the uncertain economic environment that’s ahead in 2024.
J. Brian Henderson is chief investment officer at BOK Financial.
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