How the US Avoided a Recession in 2023, and What to Expect in 2024

stock market price displayAt the start of 2023, many financial observers (including the economics department) expected the US economy to suffer a recession during the year, most likely during the first half of the year. The Federal Reserve was fighting inflation with a campaign to raise short-term interest rates. Those higher rates were expected to cool business and residential investment spending and eventually lead to decline in overall economic activity.

Why the Recession Never Happened in 2023

The US economy confounded those expectations by expanding in each quarter of 2023. Real GDP rose at an annualized rate of 4.9% during the third quarter, its strongest growth since the end of 2021. Consumer spending helped to propel domestic economic activity, with demand for services leading the way, although demand for durable goods was particularly strong in the first and third quarter. Government expenditures were also a solid contributor to overall economic activity. Following two years of marginal declines, inflation-adjusted government spending rose 4.0% in 2023.

Higher interest rates put a damper on residential construction, causing spending to decline at an even faster pace than it did in 2022. Rates for conventional 30-year mortgages reached a two-decade high by late October, reducing the affordability of housing for prospective purchasers. In addition, existing homeowners with previously issued mortgages became more reluctant to move, constraining the supply of existing housing on the market.

The higher interest rates did not cause overall business investment to decline in 2023, although the performance across different categories of investment varied widely. Structures investment rose at a double-digit rate in 2023, spurred by projects to build production facilities for semiconductors and electric vehicle batteries. Purchases of transportation equipment also expanded at a rapid pace. The gains in those segments offset declines in investment in industrial equipment and information-processing equipment.

The US labor market remained ebullient, with new hires increasing throughout the year. The unemployment rate rose marginally during the year, but at the start of 2024, there were no imminent signs of contraction in demand for labor.

The 2024 Economic Outlook

The outlook for 2024 is for the US economy to continue expanding, but at a decelerating rate, with real GDP growth of 1.4%. Household consumption spending will moderate, with demand for services outpacing that for durable goods.

Nonresidential fixed investment spending will post slight gains, as spending on structures and intellectual property creation decelerates. Purchases of information processing equipment will rebound from the 2023 contraction.

During 2024, real construction spending is forecast to rise at a pace similar to that achieved in 2023. Nonbuilding construction will again be a steady performer, with construction of power facilities expected to lead the way. Commercial building activity will be virtually unchanged in the aggregate in 2024. Industrial construction spending will decline somewhat after the outsized growth the previous year. Even with that contraction, the level of expenditures will still be 35% above that in 2022. The lodging and healthcare segments are forecast to see solid growth in 2024. Office construction will continue to slide, although at a decelerating pace.

The residential market is expected to achieve marginal gains in 2024 before a stronger recovery in 2025. Mortgage interest rates began to backtrack in the final two months of 2023, and they are not anticipated to have any noticeable upward movement in 2024, which should provide some support to new housing construction during the year, although housing affordability will continue to be a concern. Single-family housing construction will begin to rebound, while multifamily housing construction will retreat from its 2023 peak. The recent additions to multifamily stock will temper rent increases, thereby reducing the expected profitability of further construction to boost the number of units. Improvement spending will decline slightly in inflation-adjusted terms before expanding again in 2025.

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About the AuthorThomas Bowne is the Chief Economist at a research division of called The Freedonia Group, where he has worked for more than 25 years. His team develops the macroeconomic indicators that underpin all Freedonia's research so their insights tell a consistent story. He has a bachelor's degree in economics from Princeton University and a master's degree and a law degree from Stanford University.

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