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US recession avoided in 2023, but what’s in store for 2024?

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December 2023

Despite high inflation and the pain from tight credit, the US has avoided a recession – so far – but is an economic downturn inevitable in 2024? Eric Hundahl, BNY Mellon Investment Management Head of Portfolio Strategy, says there are still hurdles to overcome before we’re out of the woods.


  • The market is split whether the US will enter a recession in 2024
  • Consumer spending on services and goods are near pre-pandemic levels
  • The strength of the labor market will strongly influence the likelihood of a recession

A recession in 2023 seemed inevitable with high inflation and the Federal Reserve (the Fed) raising interest rates, but a strong US economy prevailed. The market is evenly divided on whether a recession in 2024 will come to fruition, according to Eric Hundahl, BNY Mellon Investment Management Head of Portfolio Strategy.

Strength of the consumer

“The probability of a recession in the US is elevated next year relative to history, but the economic data continues to surprise us on the upside, and the market is much more resilient than what many people expected going into this year,” says Hundahl. “That's largely driven by the strength of consumer and household balance sheets, but also because inflation has surprised us to the downside, which tells us that the Fed probably doesn't have to do much more.”

During the third quarter of 2023, consumer spending rose for both services and goods – approaching pre-pandemic levels. Consumer sentiment is also on the upswing, fueling a shopping versus saving mentality. This has come as a surprise to some given the much-anticipated headwind from the restart of college student loan payments.

Consumer sentiment graph

Labor market is in control of a recession

The labor market has been rebalancing itself with unemployment remaining low while real disposable income is growing – albeit at a slowing rate.

“If inflation continues its path downward towards target and wage growth slows but remains strong then real income growth should remain sufficient to avoid a recession,” says Hundahl. “If labor market remains tight, yet the progress on bringing inflation down to target begins to stall then the Fed may need to consider additional tightening. Raising rates while the economic growth continues its path downwards could tip us into a shallow recession.”

The labor force participation rate is above pre-pandemic levels for workers 25 to 54 years old. This demographic returning to work is key because the trend of baby boomers retiring early – and therefore the workforce shrinking - isn’t likely to end any time soon.

“If the labor market continues to remain tight in 2024, then we would expect continued improvement in participation for prime-aged workers,” says Hundahl. “However, overall we would expect labor force participation to continue to decline based on demographic trends.”

 Labor force participation rate graph

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