At least for the market, the major economic narrative for 2024 is that a recession has not yet arrived. The U.S. economy will grow for the third consecutive year by at least 2.5%, and may ultimately be closer to 2.7%.
The Citigroup economist team led by Andrew Hollenhorst admits that their prediction of a comprehensive contraction in the U.S. economy was completely wrong. They said, 'Our main mistake was underestimating the extent to which the growing net worth of high-income individuals and the loose financial condition of large corporations continue to drive economic activity.'
However, they did make some correct predictions — accurately forecasting stubbornly high inflation and a 100 basis point rate cut (almost everyone expects the Fed to cut rates by 25 basis points next week). In summary, the team rated themselves a B for this year.
Now, they are elaborating on their views for 2025, and this perspective is somewhat pessimistic: they expect companies to shift from reducing hiring to outright layoffs. This, in turn, will lead to a decline in consumer spending and business investment. They stated that even if their view on layoffs is wrong, the slowdown in income growth due to hiring slowdowns still poses risks to spending. Meanwhile, they expect that a loose labor market will ease inflationary pressures in the service sector, and weak global conditions will suppress commodity prices.
They indicated that this would lead the Fed to take aggressive action — expecting a 25 basis point rate cut at every meeting until July next year, bringing the federal funds rate down to between 3% and 3.25%. This is far below market expectations, which anticipate the federal funds rate to reach around 4% by then.
Economists say that if long-term interest rates fall, it would help the battered real estate and manufacturing sectors, but the effect won't be significant. They said, 'If the labor market develops as we expect and the unemployment rate is about to rise sharply, then the weakness in consumer health will offset any demand boost from falling interest rates.'
The new government's arrival has not significantly impacted their views, either positively or negatively. They stated that a slowdown in immigration will lead to a decrease in the supply of new workers, but this will be offset by a decline in labor demand. They noted that a 10% comprehensive tariff would only push the inflation rate up by a few tenths of a percent and would not have a significant impact on growth. Lowering the corporate tax rate to 15% might be offset by tariffs, meaning no new net fiscal stimulus.
They also do not expect any miracles regarding the U.S. fiscal deficit issue. They anticipate that the deficit will account for 6.2% of GDP, which is quite close to this year's 6.4%, significantly higher than the pre-COVID average of 3.6% in 2021.
Article forwarded from: Jin Shi Data