We were all predicting a recession in 2023, what we got instead was resilient economic growth and a 24% surge in the S&P 500. Not the first time we were wrong, because if we were always right, we would be billionaires!!

Economists and Wall Street are a lot more positive these days, but there are four trends which could still cause a recession in 2024.

Inflation

The core PCE index is hovering around 2%, which is the Fed’s target. However, the Fed has made it clear that they are taking a precautionary approach and holding rates. If inflation starts climbing again, the Fed will tighten monetary policy.

Consumer Sentiment

This is the big one. The consumer has been very resilient over the past three years. And why not? Stimulus checks were coming in and there was nowhere to spend them. Surprisingly, a lot of economic activity is derived from consumer sentiment. If the consumer feels good, they will spend money despite higher prices as they have been doing in 2023. If this sentiment keeps going up, we may be able to stave off a recession.

Labor Market

This is an odd metric this time around. But of course, COVID-19 caused a lot of odd metrics. For the Fed to reduce inflation, they normally count on people losing their jobs. Less money in hand, the demand for goods and services decreases and prices fall. It’s very unusual to see the US adding jobs for the past 35 consecutive months. It’s not so unusual when you have the government paying people to stay home. As spending cash started depleting, people started getting back to work. There were 12 million job openings in March 2022. We are down to about 8.7 million as of October of 2023. The labor market is cooling, we just hope it doesn’t start freezing over.

Corporate Profits

This is another unusual metric. Profit margins for corporations surged to record levels despite high inflation because higher prices were passed on to consumers, who didn’t care since they had accumulated savings. As a result, profits went higher, and the stock market rose higher. As consumer savings deplete, profits will start stagnating. As a result, corporations may start laying people off, leading to lower consumer spending and then of course, to a recession.

We still think we will have a recession of some type, maybe just a mild one. The reason being is that job growth is slowing and savings are depleting. Once savings are gone, the consumer will slow down spending, which in turn will lead to lower corporate profits and higher unemployment. That entire scenario can be counterbalanced by the Fed reducing interest rates sooner than the middle of 2024 which would stimulate investment and prevent layoffs.