The US economy has rebounded so much that it has reached peak momentum this quarter according to Vincent Deluard, StoneX Director of Global Macro Strategy. The economic stimulus which boosted growth in 2023 will partially reverse in 2024, and rate hikes will eventually slow demand – suggesting heightened risks of a recession in the summer of 2024.
Given this downbeat outlook, which is a discussion rather than a forecast, Deluard believes that US financial assets could underperform and foreign markets could be more attractive as we head into 2024.
“The 2024 slowdown should be driven by a reversal of the gains caused by the inflation adjustments of 2024, a much smaller impulse from the federal deficit, and a pause in local government spending,” he argues. “ ‘The long and variable lags of monetary policy will eventually pass, and the economy will feel the brunt of this brutal tightening cycle.”
What happened to the 2023 recession?
Economic data has been stronger for longer than most observers expected, with resilient consumer spending and a buoyant jobs market. Real-time indicators, such as tax collections in the past month, provide confirmation:
- Federal collections up 5.5%
- Withheld income and employment taxes up 4.9%
- Individual income taxes up 4.4%
Swings in inflation have very real economic effects
Deluard points out the real impact of changing inflation on the real economy.
- In 2023, recent inflation was high, and current inflation was falling. Cost of Living Adjustments (COLAs) and tax bracket adjustments delivered real gains in individual income.
- In 2024, on the other hand, past inflation will be based on this year’s relatively low base, so COLAs and tax bracket adjustments will be smaller.
If we project inflation settling into the long-term range of 4-5% next year, or spike higher, some 67 million social security beneficiaries would face declining real income next year. Similarly, tax bracket adjustments should be less than actual inflation next year, effectively be a stealth tax hike on all American households.
Public spending was boosted in 2023, slips back in 2024
Deluard identifies swings in public spending. Fiscal spending was elevated in 2023 due to higher interest payments on the national debt, and payments made from two acts: Inflation Reduction (IRA), and ‘Creating Helpful Incentives to Produce Semiconductors’ (CHIPS). On the other hand, at the state level the growth in public spending will slow to 2.5%, after surging by 12.6% in 2023 and 16% in 2022.
Higher interest rates will impact the economy
Finally, Deluard argues that raising rates by 500 basis points in twelve months will eventually take a toll on the economy. Most households and companies refinanced their debts in 2021, at much lower rates, and still have a lot of liquidity. Eventually, debts must be rolled over at much higher rates, and asset values must be written down. Consumers will feel the pinch. Companies’ interest expense will spike, profits will drop, and layoffs could follow.
A higher plateau of economic growth, rates, and inflation
Economic growth has consistently surprised to the upside. Deluard argues that the economy has reset to a durably higher plateau of growth, rates, and inflation. He’s not (yet) prepared to call for a recession next year for three reasons:
- 2024 is an election year: White House consultants are likely preparing a short-term spending package target at the young.
- States’ rainy-day funds and general fund balance are still flush with cash.
- Boomers may be helping their kids buy homes, passing on $84 trillion of wealth by the end of 2045, with a large tax incentive to give assets before death.
Deluard believes that a slowing US economy would have a negative impact on US assets, However, he is not ready to call next year’s recession: “I do not enough data to confidently call for a 2024 recession, but I certainly expect growth to slow next year. That would support my case for a sustained period of outperformance of non-US assets.”
Analysis by Vincent Deluard, CFA, Director, Global Macro Strategy. Vincent.Deluard@StoneX.com
Edited by Paul Walton, Financial Writer: Paul.Walton@StoneX.com