ABA advisory committee sees soft landing for the economy as recession risks decline

In its latest economic forecast, the American Bankers Association’s Economic Advisory Committee said the United States is on the path toward a soft landing.

The committee, composed of 16 chief economists from some of North America’s largest banks, said recession risks have declined, inflation continues to moderate, and employment gains remain robust.

Further, the committee sees a gentle easing cycle by the Federal Reserve starting around mid-year. The consensus view of the committee is that the Federal Reserve will begin cutting the target federal funds rate range in mid-2024, instituting three 25 basis point cuts before the end of this year.

This will facilitate GDP growth at around 1.7 percent for 2024 and 1.8 percent for 2025. As far as recession goes, the odds have diminished somewhat over the last six months, although policy and geopolitical risks keep them close to 30 percent both this year and next.

In addition, the group expects inflation to continue gradually easing toward the Federal Reserve’s 2.0 percent target by the latter part of 2025. The committee’s forecast is that core personal consumption expenditures (PCE inflation), the Fed’s preferred indicator, will be 2.4 percent at the end of 2024 before reaching 2.1 percent by year-end 2025.

“Last year’s combination of resilient growth and moderating inflation is unusual historically and should be celebrated,” said Simona Mocuta, committee chair and chief economist at State Street Global Advisors. “The elements appear in place to extend a milder version of this in 2024, although we should not take this for granted. The risks to the outlook are two-sided but nuanced. The committee sees risks to the growth forecast as fairly balanced, but risks to the inflation forecast remain skewed to the upside.”

The committee also expects the unemployment rate to reach 4.1 percent by the end of 2024 and little changed thereafter. This is well within the range for a non-recessionary period.

Despite anticipated rate cuts, the committee expects credit quality to continue to deteriorate somewhat over the coming year as high interest rates lift debt service costs. It anticipates bank consumer delinquency rates to increase slightly from 2.8 percent in 2024 to 2.9 percent in 2025.

“While credit availability remains largely intact, the cumulative effect of still-high interest rates, softening demand, lower consumer savings and a mild uptick in unemployment will drive some deterioration in credit quality,” Mocuta said.

Additionally, the committee forecasts housing starts to increase from 1.4 million in Q1 2024 to 1.5 million in Q4 2025. It also expects house price appreciation to be strong at the beginning of 2024 at 5.5 percent in Q1 2024, followed by a moderation of 2.0 percent annual growth for 2025.

“The good news is that the housing recession is over,” Mocuta said. “The not so good news is that a structural shortage of housing in the United States is keeping home prices elevated and affordability constrained.”

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