Despite the dwindling number of pessimists, major banks such as Citigroup, Deutsche Bank, and Wells Fargo continue to reaffirm that the U.S. economy will fall into a recession.

A small group of Wall Street economists, surprised by the resilience of the U.S. economy in 2023, predict that American households and businesses will face pain in the new year.

Institutions like Citigroup, Deutsche Bank, and Wells Fargo are reiterating their predictions of an economic downturn, even though the Federal Reserve and the majority of Wall Street institutions anticipate that the U.S. economy will slow down in 2024 but still achieve positive growth.

The pessimistic scenario is that consumer spending, which accounts for about 70% of economic activity, is depleting the savings accumulated during the pandemic and facing headwinds, including student loan repayments and a cooling job market. The impact of the Federal Reserve's most aggressive interest rate hikes in 40 years has merely been delayed, and the tightening of credit conditions will pose difficulties for borrowers forced to refinance their debts.

Even so, bears argue that this economic downturn will not be as ugly as the recession triggered by the COVID-19 pandemic in 2020, when the unemployment rate soared to nearly 15%; nor will it last as long as the 2007-2009 recession.

Advertisement

In the past two months, as inflation has eased, Federal Reserve officials have planned rate cuts for 2024, leading to a surge in the U.S. stock market and a plunge in U.S. Treasury yields, which has many on Wall Street celebrating the good news.

Deutsche Bank's senior U.S. economist, Brett Ryan, said of his prediction for a mild recession:

"This hardly fits the criteria for a recession, but technically, it will still be one. However, considering a dovish Federal Reserve, we won't see as much of a slowdown. Current financial conditions are quite loose, which poses an upside risk to our forecast."

Citigroup also believes that the Federal Reserve's policy adjustments have improved the economic outlook, but economists led by Andrew Hollenhorst still believe the economy will decline.

He stated,

"We believe that the effects of rate hikes have finally had the desired impact, slowing the U.S. economy. We are seeing increasing signs in the labor market, including rising unemployment rates and a sustained increase in the number of ongoing claims for unemployment benefits, indicating a slowdown in hiring."Sam Bullard, Senior Economist at Wells Fargo Securities, stated that the weakness in the labor market will eventually lead to a decline in consumer spending. So far, he has been surprised by the resilience of the economy and expects the economic downturn in 2024 to be "definitely mild by historical standards."

He said, "We fully acknowledge that the U.S. economy will continue to slow down, but it has not yet met the definition of a recession."

In the United States, whether a recession has set in is officially declared by a group of elite economists from the Business Cycle Dating Committee of the National Bureau of Economic Research, based on factors such as employment, consumer spending, and other data.

Has the recession already begun?

Foreign media analysts believe that the recession may have already begun. Chief U.S. Economist Anna Wong mentioned the rapid deterioration of the views of Federal Reserve business contacts disclosed in the Federal Reserve's "Beige Book" survey report, signs of loosening in the labor market, and the Federal Reserve's shift towards interest rate cuts. She said:

"Many of the typical signs that occur at the beginning of a recession appeared in October. We believe the economic downturn may have already occurred, and we still believe this to be true."

Nevertheless, the number of pessimists is decreasing. A year ago, economists surveyed by foreign media believed there was a 70% chance of a recession and significantly downgraded growth expectations. In March of this year, economists within the Federal Reserve also thought so.

However, by July, Federal Reserve Chairman Powell told reporters at a press conference that the staff had abandoned this forecast, instead accepting a soft landing forecast. Bank of America, JPMorgan Chase, and Barclays have also taken similar measures.

Goldman Sachs has been going against the trend, believing that U.S. household disposable income will increase significantly this year, the labor market will be strong, and there will be no recession.

According to estimates by the Atlanta Fed, the U.S. GDP growth rate for the fourth quarter is 2.7%, above the trend level. David Mericle, Chief U.S. Economist at Goldman Sachs, said, "At the time, we believed that the key risk facing the economy was re-acceleration, not recession, and we certainly were not entirely correct, as growth was even stronger than the team expected."Some economic optimists are skeptical of the view that there is a "long-term and variable lag" in the impact of monetary policy on businesses and consumers, said Neil Dutta, head of economic research at Renaissance Macro Research LLC, when referring to pessimists:

"I think it's absurd. They believe that the Federal Reserve raising interest rates has little impact on the economy at first, and then suddenly the economy just spontaneously ignites? This does not align with empirical research."