The Conference Board Economic Forecast for the US Economy
August 02, 2023 | Report
The Conference Board forecasts that the growth seen in many parts of the economy will gradually buckle under mounting headwinds later this year, leading to a very short and shallow recession. This outlook is associated with numerous factors, including, elevated inflation, high interest rates, dissipating pandemic savings, lower government spending, and the resumption of mandatory student loan repayments. We forecast that real GDP growth will slow to 1.9 percent in 2023, and then fall to 0.5 percent in 2024.
Following a period of renewed strength in early 2023, consumer spending growth has slowed in recent months. However, despite numerous headwinds associated with inflation and interest rates, US consumers have not closed their wallets altogether. This trend cannot hold, in our view. Compensation growth is decelerating, pandemic savings are dwindling, and revolving credit utilization is rising. Additionally, new student loan repayment requirements will begin to impact younger consumers later this year. Thus, we forecast that overall consumer spending will grow in Q3 2023, but anticipate a contraction in Q4 2023 and Q1 2024. As inflation and interest rates abate in 2024, we expect consumption to begin to expand once more.
Meanwhile, following weak growth in Q1 2023, business investment bounced back in Q2 2023 despite interest rate increases. This was largely due to a surge in business spending on equipment (especially computing and transportation equipment) and elevated investment in structures (especially in manufacturing). However, we expect this trend to reverse later this year as US consumption softens and interest rates continue to rise (we believe the Fed will raise rates by 25 basis points once more this year, likely in Q4 2023). Additionally, commercial and industrial lending by banks continues to decline in the wake of the US banking crisis. Residential investment, which is highly sensitive to Fed policy, has already contracted significantly as interest rates have climbed. We don’t expect a recovery in this sector until rates begin to fall next year.
Government spending represented one of the few positive growth drivers for 2023 as federal non-defense spending benefited from outlays associated with infrastructure investment legislation passed in 2021 and 2022. However, reductions in discretionary outlays ($1.5 Trillion over 10 years) detailed in the Fiscal Responsibility Act, which averted the debt ceiling crisis, will limit overall government spending and act as a drag on growth later this year and early next.
On inflation, we expect to see progress over the coming quarters, but the path will probably be bumpy. That large decrease in the reported year-over-year PCE deflator in Q2 2023 was welcome but was due in-part to base effects. Starting in Q3 2023, rents, which are a significant contributor to faster inflation, are expected to cool. This will drive inflation even lower. However, this does not mean the fight to tame inflation is over – far from it. We expect year-over-year inflation readings to remain at about 3 percent at 2023 yearend and that the Fed’s 2 percent target will not be achieved until the end of 2024.
Labor market tightness will moderate somewhat over the coming quarters but will remain acute relative to previous economic downturns, reflecting persistent labor shortages in some industries and labor hoarding in others. This should prevent overall economic growth from slipping too deeply into contractionary territory and facilitate a rebound next year.
Several factors impacted our revised forecast this month. Q2 2023 real GDP growth came in much stronger than expected (although large revisions to the advance estimate are likely) and monthly Personal Consumption Expenditure growth reaccelerated in June. Additionally, our consumer confidence index saw meaningful improvement in both June and July. Presently, we acknowledge that the likelihood of a ‘soft landing’ for the economy is rising, but we continue to believe that a very short and shallow recession is the more likely scenario.
Looking into 2024, we expect the volatility that dominated the US economy over the pandemic period to diminish. In the second half of 2024, we forecast that overall growth will return to more stable pre-pandemic rates, inflation will drift closer to 2 percent, and the Fed will lower rates to near 4 percent. However, due to an aging labor force we expect tightness in the labor market to remain an ongoing challenge for the foreseeable future.
summarize key points of the article using macroeconomic terminology,
The Conference Board’s recent economic forecast for the US economy sheds light on the evolving macroeconomic landscape. Despite initial growth, the economy is expected to face mounting challenges in the form of inflation, interest rates, declining pandemic savings, reduced government spending, and student loan repayments. This is projected to result in a brief and shallow recession. Key factors affecting the outlook include consumer spending patterns, business investments, government expenditures, inflation trends, labor market dynamics, and potential future developments.
After a strong start to 2023, consumer spending has slowed in the face of inflation and interest rate pressures. This trend is anticipated to persist due to decelerating compensation growth, reduced pandemic savings, rising revolving credit utilization, and the introduction of new student loan repayment obligations. While some growth is expected in Q3 2023, a contraction is projected in Q4 2023 and Q1 2024. The forecast indicates a potential rebound as inflation and interest rates ease in 2024.
Following weak growth in Q1 2023, business investment rebounded in Q2 2023, driven by increased spending on equipment and structures. However, this trend is forecasted to reverse later in the year due to softer US consumption and continued interest rate hikes by the Federal Reserve (expected to raise rates by 25 basis points in Q4 2023). A decline in commercial and industrial lending, coupled with a contraction in residential investment, could further impact business investment.
Government spending served as a positive growth driver in 2023, benefiting from prior infrastructure investment legislation. However, reductions in discretionary outlays outlined in the Fiscal Responsibility Act will limit overall government expenditure, exerting a drag on growth in the coming months. The expected impact of this reduction on economic growth underlines the interconnectedness of fiscal policy and economic performance.
Inflation is expected to exhibit a fluctuating trajectory, with a decrease in the year-over-year PCE deflator in Q2 2023 attributed to base effects. Rents, a significant contributor to inflation, are anticipated to cool starting in Q3 2023, further lowering inflation. Despite this, achieving the Federal Reserve’s 2 percent inflation target is unlikely until the end of 2024. This indicates the complexity of managing inflation in a changing economic environment.
While labor market tightness is predicted to ease somewhat, it will remain acute compared to previous economic downturns. Persistent labor shortages in certain industries and labor hoarding in others contribute to this trend. The report suggests that these dynamics will prevent the economy from slipping significantly into contraction and facilitate a rebound in the following year.
Several factors have influenced the revised economic forecast, including stronger-than-expected Q2 2023 GDP growth, accelerated Personal Consumption Expenditure growth in June, and improved consumer confidence. The likelihood of a ‘soft landing’ for the economy is increasing, but a brief and shallow recession remains the more plausible scenario. Looking ahead to 2024, the economy is predicted to stabilize, with reduced volatility compared to the pandemic period. Inflation is expected to approach 2 percent, and the Federal Reserve is projected to lower interest rates to around 4 percent. However, persistent labor market challenges stemming from an aging workforce are anticipated to persist.
The Conference Board’s economic forecast provides a comprehensive assessment of the US economy’s trajectory, highlighting key factors that will shape its path in the near term. The analysis underscores the intricate interplay of consumer behavior, business investment, government policies, inflation trends, and labor dynamics in determining economic outcomes. By examining these dynamics, policymakers, businesses, and individuals can gain valuable insights into potential challenges and opportunities in the evolving economic landscape.
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