Kelley Futurecast: US economy will slow slightly in first half of 2024, but end year stronger

INDIANAPOLIS — Buoyed by an expected steady decline in inflation, an economic forecast from the Indiana University Kelley School of Business is optimistic in projecting that the economy will slow modestly in the first half of 2024 and then reaccelerate in the second half of the year.

During the last quarter of 2023 and the first six months of 2024, real U.S. gross domestic product will slow to a rate of 1.6%. It will then rise to 1.8% in the final two quarters. The low point may come in the second quarter, when output growth is projected to be at a rate of 1.2%.

Inflation — as measured by the core personal consumption expenditures price index preferred by the Federal Reserve — will fall from an average of 3.9% over the past year to just 2.2% in the second half of 2024.

“Over the past year, in the face of a historic increase in interest rates by the Federal Reserve, the economy outperformed expectations,” said Kyle Anderson, assistant dean for academic programs in Indianapolis and clinical assistant professor of business economics at the Kelley School. “We think that growth will weaken, but we will remain in positive territory.”

The U.S. economy greatly exceeded what the Kelley panel predicted a year ago, due to concerns then that domestic consumption might become weak or even experience negative growth. Consumption — a measure of Americans’ spending — instead grew at a 2.4% rate during the past year. In their 2024 forecast, the professors expect that growth to moderate through the first half of the year, with growth falling to 1.3%.

“The drop in consumption will hit spending on both goods and services,” said Phil Powell, executive director of the Indiana Business Research Center and clinical associate professor of business economics and public policy in the Kelley School. “During the pandemic, households received large governmental transfer payments, and a significant amount was saved. But over the last two years, some of that ‘excess’ saving was spent. A question for next year is how much remains.”

The Kelley School presented its Futurecast 2024 today at the Indianapolis Artsgarden.

The forecast also noted that the termination of forbearance on student loan payments and government assistance for child care expenses also could be a factor.

“Even if income holds up, however, households may not continue to spend,” said Bill Witte, author of the Kelley School’s U.S. forecast and an associate professor emeritus of economics. “Consumer sentiment has declined in the past couple of months. Weakness in the labor market or problems in the financial markets would likely be a problem for consumer confidence.”

Over the past year, the strong labor market has helped to boost household income. U.S. job creation has averaged 270,000 per month, and unemployment remains close to a historic 50-year low of 3.4%. Next year, employment growth could slow down, and job losses could happen, but the forecast indicates they will be only modest declines.

Indiana could experience a slowdown in employment growth overall, said Carol Rogers, director of the Indiana Business Research Center. The state’s employment and income trend lines will mirror those of the U.S., but at lower rates of growth. Income growth is forecast to decrease in the first third of 2023 but then stabilize at just under 4% in the Hoosier state, she said.

The forecast assumes that the Fed is done raising the federal funds rate and predicts the next move by the Fed to cut rates could take place in July.

Risks to the forecast include the international impact of the conflicts in Gaza and Ukraine, including how they might unsettle commodity markets and whether upward pressures on wages affect the Fed’s fight against inflation.

Other key points from the Futurecast:

• The S&P 500 and Nasdaq-100 were both higher in 2023; this may limit increases even in a growing economic environment.
• S&P 500 valuations are elevated. The current Shiller PE Ratio — the S&P 500’s current price divided by the 10-year moving average of inflation-adjusted earnings — is at 28.88, well above the long- term mean of 17.06. The most recent price-to-sales ratio is 2.36, also higher than the long-term mean of 1.69.
• Global output is expected to grow at a rate of 2.9% in 2024. Advanced economies are expected to grow at a rate of 1.4%, while emerging market and developing economies are expected to grow 4.0%.

• Inflationary pressures experienced globally — projected at 5.8% for 2024 — are expected to ease but still put pressures on growth due to restrictive monetary policy and deterioration in purchasing power for households.

The starting point for the forecast is an econometric model of the United States, developed by IU’s Center for Econometric Model Research, which analyzes numerous statistics to develop a national forecast for the coming year. A similar econometric model of Indiana provides a corresponding forecast for the state economy based on the national forecast plus data specific to Indiana.

A detailed report on the outlook for 2024 will be published in the winter issue of the Indiana Business Review, available online in December. In addition to predictions about the nation, state and Indianapolis, it also will include forecasts for other Indiana cities and key economic sectors.

Kelley faculty will present their forecast in 10 other cities around the state. They will be joined by local panelists from other IU campuses and other universities, offering perspectives on the global, national, state and local economies, as well as the financial markets. The tour is sponsored by the Kelley School of Business and its Indiana Business Research Center, the IU Alumni Association, IU campuses and numerous community organizations.