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U.S. Economic Forecasts: What’s the Probability of a Recession in 2024?

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Visualized: U.S. Economic Forecasts, in 2024

Visualized: U.S. Economic Forecasts, in 2024

Visualized: U.S. Economic Forecasts, in 2024

For much of the last year, recession fears have been building against a sharp rise in interest rates and market uncertainty.

Only recently has there been a shift in sentiment. Given the resilience of the U.S. economy, a growing amount of investors are seeing an increasing likelihood of a soft landing—where the Federal Reserve raises interest rates to combat inflation without triggering a recession. However, many still remain cautious.

This graphic shows U.S. economic forecasts across Wall Street, Main Street, and C-Suite for 2024.

U.S. Economic Forecast: Is a Recession Coming?

Here’s what key players are projecting for the economy:

ForecasterEstimated U.S. Recession Probability (Next 12 Months)
Federal Reserve Staff0%
Yield Curve*61%
Economists48%
Consumers69%
Goldman Sachs15%
Bank of America35-40%
CEOs**84%

Source: Federal Reserve Bank of New York, Wolters Kluwer, The Conference Board, Goldman Sachs Investment Research, Bank of America. Data based on surveys and projections conducted August-September. *Based on a New York Fed model estimating recession probabilities using 10-year minus 3-month Treasury yield spreads, based on data from 1959-2009. **Conference Board Q3 CEO survey probability of a recession over the next 12-18 months.

In July, the Federal Reserve staff announced that they were no longer forecasting a recession in 2024, marking a sharp departure from earlier projections.

While the Fed staff continue to share a brighter outlook, the yield curve spread between 10-year and 3-month Treasury rates suggests there is a 61% change of a recession in the 12 months ahead. Historically, the yield curve has been a reliable predictor of recessions, based on a New York Fed model which uses data from 1959-2009.

Meanwhile, a survey of economists by Wolters Kluwer shows that they’re split, with 48% calling for a recession over the next 12 months.

Across Main Street, consumers share a more cautious sentiment, with over 69% saying that a recession is likely in the next year, based on a Conference Board survey.

Yet corners of America’s C-suite have grown more positive. Goldman Sachs recently dropped its recession forecast to a 15% likelihood while Bank of America gives it a 35-40% odds. On the other hand, 84% of CEOs are preparing for a recession in the next 12-18 months, a drop from 92% seen in the second quarter of 2023.

Bull Case vs. Bear Case Signals

Among the key factors investors are closely watching center around the impact of higher interest rates on the economy.

For the bull case, higher rates appear as though they haven’t significantly impacted consumer spending yet, although spending has slowed on non-essential items. Retail sales continue to be solid, and earnings across Home Depot, Walmart, Lowe’s, and other major retailers show resilience. Where the main changes are occurring are with consumers purchasing more affordable options.

However, consumers are relying increasingly on borrowing for spending.

For the bear case scenario, household debt has hit record highs of $17 trillion in March, rising 19% year-over-year. Higher rates have led these borrowing costs to jump, likely affecting household budgets. Meanwhile, corporate defaults have accelerated in 2023, and are projected to keep rising.

Overall, there are mixed signals across the wider economy. Quantifying the full effects of higher interest rates on consumers and businesses remains an open question.

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Markets in a Minute

Visualizing Portfolio Return Expectations, by Country

This graphic shows the return expectation gap between investors and advisors around the world, revealing a range of market outlooks.

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Visualizing Portfolio Return Expectations, by Country

Visualizing Portfolio Return Expectations, by Country

How do investors’ return expectations differ from those of advisors? How does this expectation gap shift across countries?

Despite 2022 being the worst year for stock markets in over a decade, investors around the world appear confident about the long-term performance of their portfolios. These convictions point towards resilience across global economies, driven by strong labor markets and moderating inflation.

While advisors are optimistic, their expectations are more conservative overall.

This graphic shows the return expectation gap by country between investors and financial professionals in 2023, based on data from Natixis.

Expectation Gap by Country

Below, we show the return expectation gap by country, based on a survey of 8,550 investors and 2,700 financial professionals:

Long-Term Annual
Return Expectations
InvestorsFinancial
Professionals
Expectations Gap
🇺🇸 U.S.15.6%7.0%2.2X
🇨🇱 Chile15.1%14.5%1.0X
🇲🇽 Mexico14.7%14.0%1.1X
🇸🇬 Singapore14.5%14.2%1.0X
🇯🇵 Japan13.6%8.7%1.6X
🇦🇺 Australia12.5%6.9%1.8X
🇭🇰 Hong Kong SAR12.4%7.6%1.6X
🇨🇦 Canada10.6%6.5%1.6X
🇪🇸 Spain10.6%7.6%1.4X
🇩🇪 Germany10.1%7.0%1.4X
🇮🇹 Italy9.6%6.3%1.5X
🇨🇭 Switzerland9.6%6.9%1.4X
🇫🇷 France8.9%6.6%1.3X
🇬🇧 UK8.1%6.2%1.3X
🌐 Global12.8%9.0%1.4X

Investors in the U.S. have the highest long-term annual return expectations, at 15.6%. The U.S. also has the highest expectations gap across countries, with investors’ expectations more than double that of advisors.

Likely influencing investor convictions are the outsized returns seen in the last decade, led by big tech. This year is no exception, as a handful of tech giants are seeing soaring returns, lifting the overall market.

From a broader perspective, the S&P 500 has returned 11.5% on average annually since 1928.

Following next in line were investors in Chile and Mexico with return expectations of 15.1% and 14.7%, respectively. Unlike many global markets, the MSCI Chile Index posted double-digit returns in 2022.

Global financial hub, Singapore, has the lowest expectations gap across countries.

Investors in the UK and Europe, have the most moderate return expectations overall. Confidence has been weighed down by geopolitical tensions, high interest rates, and dismal economic data.

Return Expectations Across Asset Classes

What are the expected returns for different asset classes over the next decade?

A separate report by Vanguard used a quantitative model to forecast returns through to 2033. For U.S. equities, it projects 4.1-6.1% in annualized returns. Global equities are forecast to have 6.4-8.4% returns, outperforming U.S. stocks over the next decade.

Bonds, meanwhile, are forecast to see 3.6-4.6% annualized returns for the U.S. aggregate market, while U.S. Treasuries are projected to average 3.3-4.3% annually.

While it’s impossible to predict the future, we can see a clear expectation gap not only between countries, but between advisors, clients, and other models. Factors such as inflation, interest rates, and the ability for countries to weather economic headwinds will likely have a significant influence on future portfolio returns.

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Markets in a Minute

Recession Risk: Which Sectors are Least Vulnerable?

We show the sectors with the lowest exposure to recession risk—and the factors that drive their performance.

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Recession Risk: Which Sectors Are Least Vulnerable?

Recession Risk: Which Sectors are Least Vulnerable?

In the context of a potential recession, some sectors may be in better shape than others.

They share several fundamental qualities, including:

  • Less cyclical exposure
  • Lower rate sensitivity
  • Higher cash levels
  • Lower capital expenditures

With this in mind, the above chart looks at the sectors most resilient to recession risk and rising costs, using data from Allianz Trade.

Recession Risk, by Sector

As slower growth and rising rates put pressure on corporate margins and the cost of capital, we can see in the table below that this has impacted some sectors more than others in the last year:

SectorMargin (p.p. change)
🛒 Retail
-0.3
📝 Paper-0.8
🏡 Household Equipment-0.9
🚜 Agrifood-0.9
⛏️ Metals-0.9
🚗 Automotive Manufacturers
-1.1
🏭 Machinery & Equipment-1.1
🧪 Chemicals-1.2
🏥 Pharmaceuticals-1.8
🖥️ Computers & Telecom-2.0
👷 Construction-5.7

*Percentage point changes 2021- 2022.

Generally speaking, the retail sector has been shielded from recession risk and higher prices. In 2023, accelerated consumer spending and a strong labor market has supported retail sales, which have trended higher since 2021. Consumer spending makes up roughly two-thirds of the U.S. economy.

Sectors including chemicals and pharmaceuticals have traditionally been more resistant to market turbulence, but have fared worse than others more recently.

In theory, sectors including construction, metals, and automotives are often rate-sensitive and have high capital expenditures. Yet, what we have seen in the last year is that many of these sectors have been able to withstand margin pressures fairly well in spite of tightening credit conditions as seen in the table above.

What to Watch: Corporate Margins in Perspective

One salient feature of the current market environment is that corporate profit margins have approached historic highs.

Recession Risk: Corporate Margins Near Record Levels

As the above chart shows, after-tax profit margins for non-financial corporations hovered over 14% in 2022, the highest post-WWII. In fact, this trend has been increasing over the past two decades.

According to a recent paper, firms have used their market power to increase prices. As a result, this offset margin pressures, even as sales volume declined.

Overall, we can see that corporate profit margins are higher than pre-pandemic levels. Sectors focused on essential goods to the consumer were able to make price hikes as consumers purchased familiar brands and products.

Adding to stronger margins were demand shocks that stemmed from supply chain disruptions. The auto sector, for example, saw companies raise prices without the fear of diminishing market share. All of these factors have likely built up a buffer to help reduce future recession risk.

Sector Fundamentals Looking Ahead

How are corporate metrics looking in 2023?

In the first quarter of 2023, S&P 500 earnings fell almost 4%. It was the second consecutive quarter of declining earnings for the index. Despite slower growth, the S&P 500 is up roughly 15% from lows seen in October.

Yet according to an April survey from the Bank of America, global fund managers are overwhelmingly bearish, highlighting contradictions in the market.

For health care and utilities sectors, the vast majority of companies in the index are beating revenue estimates in 2023. Over the last 30 years, these defensive sectors have also tended to outperform other sectors during a downturn, along with consumer staples. Investors seek them out due to their strong balance sheets and profitability during market stress.

S&P 500 SectorPercent of Companies With Revenues Above Estimates (Q1 2023)
Health Care90%
Utilities88%
Consumer Discretionary81%
Real Estate
81%
Information Technology78%
Industrials78%
Consumer Staples74%
Energy70%
Financials65%
Communication Services58%
Materials31%

Source: Factset

Cyclical sectors, such as financials and industrials tend to perform worse. We can see this today with turmoil in the banking system, as bank stocks remain sensitive to interest rate hikes. Making matters worse, the spillover from rising rates may still take time to materialize.

Defensive sectors like health care, staples, and utilities could be less vulnerable to recession risk. Lower correlation to economic cycles, lower rate-sensitivity, higher cash buffers, and lower capital expenditures are all key factors that support their resilience.

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