The Congressional Budget Office said it expects economic growth to slow next year and unemployment to rise in updated economic projections released Friday.
The nonpartisan group of congressional budget analysts predicts that the Federal Reserve will be successful in its mission to drive down inflation, but with economic costs. While gross domestic product growth will remain positive next year, GDP growth will be slower through 2024. It lowered its growth projections from its last report of this nature in February.
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Real GDP growth will slow to a 1.5% annual rate in 2024, according to the report. That is an entire percentage point lower than projected in February. The CBO projects that as the Fed begins easing monetary policy, GDP will increase by 2.2% in 2025, a bit lower than it previously forecast.
Likewise, the Fed’s actions are expected to cause unemployment to rise. Thus far, the labor market has remained remarkably resilient in the face of the rate hikes. Unemployment has fluctuated between 3.4% and 3.9% over the past year or so, a historically low level.
But the CBO predicts that will change as the new year dawns and an economic slowdown, induced by months of higher interest rates, begins to filter through to the broader economy.
The unemployment rate will tick up to 4.4% by the end of next year, the CBO projects, and will remain at the higher level through the end of 2024 — about a full percentage point higher than it has been over the past year or so.
“The labor force grows at a moderate pace, with an increased contribution to that growth stemming from projected immigration over the next two years,” the report said.
Employment growth has been positive now for three years straight, with the last monthly decline in jobs registering in December 2020. The economy again beat expectations in November and added nearly 200,000 more jobs, and the unemployment rate dropped slightly to 3.7%.
Notably, not once does the latest CBO report mention the phrase “recession.” The Fed has been attempting to pull off a “soft landing,” which is where a recession is avoided despite the higher interest rates and too-high inflation is vanquished.
Late last year, some economic models were predicting there would be a recession by now. Instead, gross domestic product growth (a key indicator) has increased this year.
A revision to the third-quarter GDP projections released last month showed that economic growth expanded at a 5.2% seasonally adjusted annual rate in the third quarter of this year, the strongest growth since the pandemic rebound and, before that, 2014.
GDP growth was 2.1% in the second quarter and 2.2% in the first quarter of this year. The Atlanta Fed's “GDP Now” tracker predicts that GDP growth in the final quarter of this year will be 2.6%.
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Forecasters are now split on whether a recession will hit next year. Some analysts expect a mild recession, but others are now leaning into the notion that, with rate cuts on the horizon, one might be avoided altogether.
“PNC expects a decline in consumer spending in the second half of 2024 as the U.S. economy enters into a mild recession,” PNC chief economist Gus Faucher said on Thursday. “High interest rates and modest job losses will cause households to turn more cautious. However, there’s still about a 45% probability that the U.S. economy avoids recession and consumer spending growth slows but does not outright decline.”