Atlanta, Georgia, Feb. 28, 2024 (GLOBE NEWSWIRE) -- Economic growth in 2023 was robust when measured by gross domestic product (GDP), but business investment had turned anemic. As a result, 2024 will be a year of growth reset and, then with the help of “practical” rate cuts by the Federal Reserve, will lead to growth resurgence in 2025, according to Economic Forecasting Center Director Rajeev Dhawan of Georgia State University’s J. Mack Robinson College of Business.
“2023 ended robustly by the GDP metric. However, business investment, the predictor of future economic activity, was getting weaker every quarter, setting the stage for below-trend growth in the second half of 2024,” Dhawan said today (Feb. 28) during his semi-annual Economic Forecasting Webinar for the nation.
Another key factor the forecaster said will contribute to a growth reset in 2024 is the quality of the jobs created last year that are suppressing consumers’ income growth due to:
- Ongoing job market compression (corporate layoffs and postponed hiring) among well-paying, white-collar, middle-management jobs, worsening by mid-year.
- “Unbalanced” job gains, with two-thirds of last year’s job additions occurring in lower-paying wage sectors (e.g. hospitality, retail, social assistance, gig economy, and most of healthcare) that also produce part-time jobs, making for low consumer purchasing power.
Dhawan characterized the prospect for future corporate job additions as “iffy, because the mood in the C-suite is cautious. But labor hoarding of frontline employees will continue in the human-contact-heavy service sectors of hospitality and healthcare.”
“The banking sector, particularly midsize banks holding large commercial real estate portfolios mostly in the office market, is now having to keep a sizable equity cushion for loans that may sour in the future,” Dhawan said. “These banks will continue to be constrained in making new business loans, especially to smaller-sized firms that rely primarily upon banks for trade finance.”
“Inflation has already moderated two-thirds from its high of 9 percent in mid-2022 to 3.1 percent in Jan. 2024 (year-over-year change),” Dhawan said. “Inflation is always sticky, meaning it declines much more slowly than output. It would be a policy mistake for the Fed to experience a pronounced growth slowdown before starting their rate-cutting regime.”
The Federal Reserve’s Dec. 13 “dot plot” (a graphic indicating where each official sees interest rates rising or falling) shows three rate cuts in 2024 totaling 75 basis points. Dhawan posits that rate cuts will be ‘”practical” to ensure conditions are conducive to a soft landing instead of a stall.
“The Fed is itching to cut rates but is delayed by ‘data noise.’ Look for much more aggressive rate cuts than their dot plot implies, beginning in June and totaling 175 basis points by next spring. The Fed will start with a rate cut of 25 basis points, a baby step of sorts, then ramp up the amount of basis points cut with each subsequent reduction. These rate cuts will help produce trend GDP growth in 2025 with job gains in every sector,” Dhawan said.
U.S. GDP growth on a Q4/Q4 basis will slow from 3.1 percent growth in the fourth quarter of 2023 to 1.4 percent in the last quarter of 2024. As sharp Fed rate cuts make their impact by late summer 2025, the economy will rebound to an above-trend rate of 2.0 percent in the fourth quarter of 2025.
Rate cuts will offer some relief to the housing market by bringing down mortgage rates, primarily for sales of newly built homes, Dhawan said. “Even with aggressive rate cuts, 70 percent of existing mortgages will still be at a lower rate than will prevail in the market even after the Fed cuts rates. But, there will be a mini refinance boom among people who bought houses in the past year.”
One caveat to Dhawan’s growth resurgence forecast for 2025 is the price of oil. Russia’s invasion of Ukraine in 2022 initially led to a sharp spike in gasoline prices that eased in 2023 (more domestic oil output plus sustained releases from strategic petroleum reserves), putting some money back in consumers’ pockets and helping retail sales.
“Fortunately, the volatile situation in Middle East hasn’t produced a lasting oil-price spike,” Dhawan said. “Any deterioration or expansion of hostilities in that region could cause a world oil supply shock, raising prices at home too. Such an inflation shock would derail any rate cut plans by the Fed this year, putting next year’s growth prospects in jeopardy.”
Highlights from Rajeev Dhawan’s National Economic Forecast
- U.S. real GDP growth on an annual average basis will be 2.3 percent in 2024, 1.5 percent in 2025, and 2.2 percent in 2026.
- National job growth will weaken sharply to only 35,000 monthly gains in the second half of 2024, rebounding to 115,000 job gains by late 2025 as aggressive Fed rate cuts spur investment spending. Job growth will be a better 137,000 monthly rate in 2026.
- CPI inflation will come down from its 4.1 percent rate in 2023 to 2.4 percent in 2024, moderate further to 1.6 percent in 2025, and 2.2 percent in 2026. After averaging 4.8 percent in 2023, core inflation will drop to 2.9 percent in 2024, and then moderate to 2.2 percent in 2025.
- The 30-year mortgage rate after averaging 6.8 percent in 2024, will moderate sharply to 5.8 percent in 2025, and further decrease to 5.7 percent in 2026.
- Housing starts will average 1.413 million in 2024, 1.455 million in 2025, and 1.450 million in 2026.
- Vehicle sales after averaging 15.5 million in 2023 will be lower at 15.1 million in 2024. They will then rise to 16.3 million in 2025, and further to 17.0 million in 2026.
Attachments
- Economic Forecaster: “Practical” Rate Cuts in 2024 Will Deliver a Growth Resurgence in 2025
- Dr. Rajeev Dhawan
