Outlook

The belief among investors that the Federal Reserve would cut rates aggressively in 2024, even in the absence of a growth or employment shock had become near-universal even before the central bank’s decisively-dovish pivot at the December policy meeting. Inflation is fading quickly. Energy and manufactured goods prices are still coming down, and our estimates suggest that the Fed’s preferred measure—the core personal consumption expenditures index—rose less than 2 percent on an annualized basis over the six months ended in November. Unemployment rates remain near historic lows. With the legacy of a three-year surge in deficit spending and credit growth...

Markets risk turning overoptimistic on underlying trends: Fiscal support is turning negative, consumer spending is running on fumes as savings rates run well below, and pre-pandemic norms diffusion indices are pointing to a renewed rise in unemployment rates. Non-farm employment diffusion indices, share of industries reporting growth (unchanged cut by half) As the lagged effects of monetary tightening become increasingly evident in rate-sensitive sectors, we expect recessionary headwinds to grow stronger, culminating in a downturn beginning before June 2024. Warning signs should multiply in the coming months, with economic surprise differentials narrowing against the US. GDP-weighted economic surprise indices