American exceptionalism can be a controversial idea among historians: Is the nation intrinsically different than other countries?
American exceptionalism is a controversial concept. But as we survey the global economy today, there is no doubt that the nation has emerged from the pandemic with greater momentum than its peers. We believe the United States can keep growing through the year ahead. But risks to the outlook must be respected.
Supportive policy and good fortune founded outperformance in 2023. Post-pandemic fiscal stimulus in the U.S. was larger and wider than it was elsewhere, boosting consumption and business investment. The United States has also remained economically remote from the geopolitical tensions that have arisen over the past two years.
While the U.S. economy has exceeded expectations, headwinds are gathering. Consumers are becoming more constrained. Inflation remains elevated. The real consequences of higher interest rates have not yet been fully realized. Fiscal policy is likely to turn restrictive. Credit conditions are tightening, especially in the arenas of residential and commercial real estate.
Events of the past year added to the long-running trends of governmental instability and fiscal imbalance, neither of which are poised to improve in the year ahead. Repricing of U.S. Treasury notes in 2023 showed that buyers of U.S. sovereign debt are concerned about a growing risk profile. Fiscal matters will be among the highly contentious issues that will surround the 2024 election.
The U.S. did not suffer the worst of the afflictions of recent geopolitical tensions.
Despite these challenges, we believe growth will persist at a modest pace. Strong labor markets should continue to underpin consumer spending. Falling inflation is raising real incomes. Recent gains in business investment provide further reason for optimism.
Our forecast for uninterrupted growth introduces a separate risk: The U.S. economy could avoid a “landing” entirely, creating the risk of reflation. Inflation is difficult to contain once it begins; another disruption could start a new inflationary cycle. In this event, the Federal Reserve would err on the side of further hikes.
In our base case, however, the Fed’s rate hiking cycle has finished. The odds of policy rate cuts will rise as inflation progresses towards its 2% target. Absent further disruptions, we expect this will happen in the third quarter of 2024.
A soft landing following recent circumstances would be without precedent. Inflation has never been tamed without a downturn and significant job losses. But having made it this far without a recession, we believe a soft landing is the most likely outcome.
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