After strong 2023, PNC no longer expects a recession in 2024

The U.S. economy performed much better in 2023 than PNC, and most economists, expected at the beginning of last year.

Starting in November, 2022, PNC viewed a mild recession as the most likely near-term outcome. But not only was there no recession last year, the economy was much stronger than expected.

Inflation-adjusted GDP, the broadest measure of the economy, grew by 3.1% — the best year since 2004, excluding 2021, when the numbers were skewed by the pandemic. The unemploymentrate ended 2023 at 3.7%, close to a 50-year low, and up just slightly from 3.5% at the end of 2022.

As we enter 2024 with a solid economy, the job market doing very well and inflation slowing, PNC is withdrawing its near-term recession outlook in its February forecast. Growth will be slower this year than in 2023 and the unemployment rate will increase slightly. But the economy will continue to add jobs on net, consumer spending will increase and inflation-adjusted household incomes will rise.

So what did I get wrong when I was expecting a recession in 2023?

I thought that much higher interest rates would create a significant drag on economic activity. The Federal Reserve, concerned about high inflation, aggressively increased both shortterm and long-term interest rates throughout 2022 and into 2023 in an effort to cool off economic growth and reduce inflationary pressures in the U.S. economy. Higher interest rates did weigh on some segments of the economy, especially housing and manufacturing, which tend to be more interest-rate sensitive.

In addition, I put too much stock in what has historically been a very reliable recession indicator, the inverted yield. Typically an inversion in the yield curve — when yields on short-term U.S. Treasury securities are above those on longer-term Treasurys — is almost always followed by a recession. The yield curve inverted in the fall of 2022, and the inversion has persisted into 2024.

But this time around, the yield curve sent a false signal, and the economy did very well in 2023. There were a number of reasons for this.

First, Federal Reserve efforts to reduce long-term and short-term interest rates in the immediate aftermath of the pandemic distorted Treasury yields and made the inverted yield curve an unreliable indicator.

But more importantly, other factors kept the economy moving forward. Job gains were still very strong in 2023, although they slowed somewhat from 2022. At the same time, wage growth was strong, and slowing inflation meant that incomes were rising faster than prices.

Household spending also benefited from savings accumulated during the pandemic and rising wealth thanks to higher stock prices and home values. With consumer spending making up about two-thirds of the U.S. economy, this was the big driver of growth.

Additional support came from federal government spending from the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS and Science Act; this offset the drag from weaker homebuilding.

In January 2024, the U.S. economy added 353,000 jobs, the best month for job growth in a year. The unemployment rate was 3.7% and has been below 4% for two straight years, the longest such stretch since the late 1960s. Wage growth was also good in January, with average hourly earnings up 4.5% from a year earlier, well above inflation of 3.1%.

With the very strong labor market, as well as continued gains in household wealth, consumer spending is well-positioned to drive overall economic growth this year. However, households’ need to increase their savings will be a bit of a drag on consumer spending growth this year.

In addition, with inflation slowing, the Federal Reserve is positioned to cut shortterm interest rates starting later this year; this will support homebuilding, consumer purchases of bigticket items and business investment. But weaker growth in government spending will somewhat offset this.

Given all of this, PNC is forecasting economic growth of slightly higher than 1% this year. Job growth will slow to below growth in the number of people entering the workforce, and thus the unemployment rate will increase slightly over the course of 2024, to somewhat above 4%.

This is still a low unemployment rate compared to its long-run history, however.

A higher unemployment rate will create a bit more slack in the job market and lead to slower wage growth, reducing inflationary pressures. Thus, U.S. inflation is likely to be at the Federal Reserve’s 2% objective by the end of the year.

All in all, 2024 should be a solid one for the U.S. economy.