5 February 2024Deutsche BankResearch North America United States Economics US Economic Perspectives Date Outlook update: Back in (the) black and (so far) done dirt cheapnWhen we first adopted a mild recession as our baseline forecast, a key element was that, with an economy far from the Fed's objectives, the history of central bank-induced disinflations showed the path to a soft landing was narrow if not unprecedented. We now think the economy will land on this narrow path and that a recession will be averted with limited cost in the labor market.nThe US economy performed as well as could have been hoped for in 2023. The labor market returned to better balance without unemployment rising materially and core PCE inflation fell below 2% annualized in the second half of the year. We see virtuous dynamics at play that could extend these positive developments, including an easing of financial conditions that has trimmed downside risks to growth.nOur updated forecasts now see growth this year at 1.9% (Q4/Q4), up meaningfully from our prior forecast of 0.3%. Consistent with our more optimistic view on growth, we also anticipate that the unemployment rate will rise only modestly to 4.1% over the year ahead as payroll gains slow and labor force participation rises somewhat further.nAlthough inflation could firm some in the near-term, we ultimately believe it is sustainably falling towards the Fed’s target. Stronger growth is unlikely to derail this trajectory. Our inflation forecasts are little changed at rates within a few tenths of a percent of the Fed's objective, with core PCE and CPI ending the year at 2.2% and 2.6%, respectively.nThese revisions maintain a case for Fed rate cuts this year, though less than in our prior forecast. We continue to anticipate that the first rate cut will come in June but that the Fed will only cut rates by 100bps this year. Next year, we expect the Fed to gradually move rates closer to a neutral level of 3.5%. Risks are balanced around our Fed expectations this year, but we see longer-term risks skewed towards a higher nominal neutral rate (e.g., 4%).nRisks around our new growth view are also reasonably balanced. Downside risks remain from the potential for greater pass through of prior Fed tightening and elevated geopolitical risks, which keep recession probabilities somewhat higher than unconditional historical averages. Conversely, we see reasonable prospects that growth continues to surprise to the upside, particularly as financial conditions have eased and with the potential for stronger productivity to continue to provide a boost.Matthew Luzzetti, Ph.D.Chief US Economist+1-212-250-6161Brett RyanSenior US Economist+1-212-250-6294Justin WeidnerEconomist+1-212-469-1679Amy YangEconomist+1-212-454-9893Suvir RanjanResearch AssociateDeutsche Bank Securities Inc.IMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATION...
