Just like that, a new year is here, and with it, a myriad of wins and losses across the U.S. economy. The year 2023 has been characterized by high interest rates, a tough housing market, bank lending tightening, stubborn but receding inflation and a resurgence of Chapter 11 bankruptcies, particularly in the consumer products, retail, real estate/construction and healthcare sectors.
For these reasons and more, the spectre of a recession has haunted most of 2023, with conjecture moving from severe-to-mild or no recession in 2024.
Despite these predictions and assumptions, several areas of the U.S. economic engine promise both good news and concern in 2024.
The Markets, Inflation and Recession Concerns
The U.S. equities market is at a very different place than it was at the beginning of 2023, roaring back with a total return of about 24% year-to-date, with the S&P 500 less than 2% away from an all-time high. The most recent rally in stocks and bonds was sparked by the Federal Reserve’s (Fed) statement in December that interest rate hikes have ended and that it will seek to begin cutting rates in 2024. That situation is the polar opposite of 2022, when a series of interest rate hikes led to an 18% decline in the S&P 500 index.
Most market watchers expect the market and economy to grow further in 2024, albeit at a slower pace, but there are still several areas to be concerned about.
Inflation is down about a third from its peak of 9% in June 2022. The U.S. economy as expressed in real gross domestic product (GDP) grew at 4.9% in the third quarter, slightly below expectations of 5.2% growth. However, recent monthly data shows a slowdown in economic momentum, posing a risk of recession. While business spending, particularly in manufacturing, showed unexpected resilience, declining corporate profits are dampening capital investments, affecting overall growth.
Consumer activity was strong in the third quarter with robust job growth and higher wages. Yet more evidence indicates that consumers are drawing down on savings and taking on more debt to sustain their current spending levels, which will likely lead to a rise in delinquencies.
Wall Street has developed two views regarding the potential for a recession. In the first scenario, a mild recession beginning sometime later in 2024, given tighter lending conditions, slows down the economy over the next few quarters.
However, this first scenario is likely to be delayed, if it materializes at all, due to (i) resilience in automobile sales, (ii) a robust labor market, (iii) increased investment in technology and new factories, and (iv) continued consumer spending. Sustained demand remains for new homes, even though higher interest rates and elevated housing prices make homeownership or relocations very expensive, and especially out of the reach of younger potential homebuyers.
The resilient performance of the U.S. economy in 2023, together with a decline in inflation, has instilled optimism for a mild economic recession and can be seen by a notable shift in sentiment, marked by widespread upward adjustments to growth projections, according to UBS.
However, if historical trends hold up, recession in some form is likely and might be delayed until 2025. In years when the yield for three- and ten-year Treasuries is inverted, as it was in March of last year, recessionary effects followed 12 to 18 months later.
In scenario two, in which top analysts at Goldman Sachs, Morgan Stanley and J.P. Morgan are in consensus, the U.S. will not fall into a recession but will instead experience slow growth because of drags from a struggling commercial real estate market, a poor outlook for housing and less government stimulus.
This mixed bag of potential outcomes could make for a bumpy and volatile ride in 2024.
In part II of this series, we will examine the topics of credit markets and banking, defaults and bankruptcies, and what whose who watch the credit markets should be most aware of in the coming year.
About the authors: This article was written by four credit markets experts from Alvarez & Marsal: Andrea Gonzalez, Managing Director UCC Practice; Mark Greenberg, Managing Director UCC Practice Co-Chair; Rich Newman, Managing Director UCC Practice Co-Chair; and Seth Waschitz, Senior Director UCC Practice.
Posted at MediaVillage through the Thought Leadership self-publishing platform.
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The opinions expressed here are the author's views and do not necessarily represent the views of MediaVillage.org/MyersBizNet.