Economic forecast 2024: 3 key things to know

Will the tailwinds from a better-than-expected end to 2023 extend into 2024? Here’s a look at what to watch for in the markets and economy in the next year.

In 2023, the U.S. economy was surprisingly strong despite a series of interest-rate increases and persistent inflation. Consumer spending remained steady, the job market was strong, unemployment was low and wage growth was above 4%. The stock market rallied late in the year and ended on a high note.

What will 2024 hold? Eric Freedman, chief investment officer at U.S. Bank, believes that the New Year will bring a slowing economy. Here are three things to know. 

1. The Fed will likely begin cutting interest rates

After 11 interest rate hikes since 2022, we believe the Fed is done increasing rates. While others feel the Fed will start cutting rates as soon as the first quarter, we think that’s premature based on the data we evaluate.

There are a few reasons why:

• Both U.S. and foreign economies are still seeing inflation pressures.
• The previous rate hikes have slowed consumer and business spending.
• While still solid, the job market is slowing.
• Wage growth is coming down.

The Fed has a 2% inflation target, and the annual inflation rate is 3.1% for the 12 months through November. So, while inflation has slowed, it remains above that target, which means interest rates may take a while to come down. 

2. Consumer spending will continue to slow...slowly

It can take time for interest rate increases to take effect. However, we’re starting to see signs that consumers are feeling the pinch, and that will have an impact on businesses as well (which are often the beneficiary of strong consumer spending). 

Even though the job market is tightening, and accumulated savings are dwindling, we anticipate consumer spending will slow gradually rather than stop abruptly. As a result, our U.S. Bank economics team believes we’ll likely avoid a recession.

3. There are places to invest in both stock and bond markets

We see investment opportunities in a few different sectors:

• In the stock market, technology (particularly artificial intelligence) and healthcare sectors remain favorable.
• In the bond market, high quality bond yields are at their highest since 2007. Investors should consider deploying cash toward a more diversified bond strategy that includes both high quality and certain lower quality bonds, such as high yield municipal bonds or residential mortgage bonds not backed by government agencies, to enhance income.

More important than what the markets or economy are doing is having and sticking to a financial plan. Focus on your financial goals and the time in the market it will take to achieve them rather than trying to time the market to score quick gains.

Want more details? Read our interview with Eric Freedman or take a deeper dive into the markets and economy in our 2024 investment outlook.