Despite Certain Downside Risks, U.S. Will Avoid Recession

Despite easing inflation, the U.S. economy will face certain headwinds in early 2024, including relatively high interest rates, a strong dollar, near recessions in Europe and China and continued geopolitical conflicts.

Resilience will come from the U.S. consumer, so often the mainstay of the global economy. Consumer balance sheets are strong and wage growth will outstrip inflation for at least the first half of 2024. As a result, spending on services such as health, leisure and hospitality will provide vitality and some job growth.

There is an increased chance that the U.S. will avoid a recession and achieve a soft landing in 2024. There will be an economic slowdown and downside risks will be elevated but the unemployment rate will rise to only around 4.5%, which won’t materially weaken real estate fundamentals except in the office sector.

Figure 1: U.S. Consumer Wealth Index

Note: The model assumes 50% stock and 50% home.
Source: Oxford Economics, Federal Housing Finance Agency, Standard & Poor's, Haver Analytics, CBRE Research Q3 2023.

Inflation Expected to Ease

The inflation rate will start the year at around 4% but fall steadily to around 2.7% by year-end. A weaker global economy will keep commodity prices muted, while a return to pre-pandemic supply chain efficiency will buoy the auto industry and an increase in labor supply will temper wage growth to more sustainable levels. Core inflation could even surprise on the downside due to tight credit conditions and broader weakness in the global economy. Upside risks to headline inflation include geopolitical conflicts and oil production cuts. Construction cost growth that has been limiting new development will ease in 2024.

Figure 2: U.S. Consumer Price Index (Y-o-Y Change)

Source: Bureau of Labor Statistics, CBRE Research, October 2023.

Fed Will Begin Lowering Rates

Despite the risk of higher headline inflation if oil prices rise in 2024, the U.S. Federal Reserve will mainly focus on core inflation, which excludes food and energy prices, and the broader risks from the global economy and the banking sector. The Fed will reduce short-term interest rates to around 4.25% by year-end 2024 and to 3.5% in 2025. This would be a much slower pace than during previous rate-reduction cycles due to the resilience of the U.S. economy. If the downside risks materialize, the Fed can lower rates more quickly due to the decline in inflation.

Gently falling interest rates amid generally solid real estate fundamentals will revive real estate capital markets activity above its currently very depressed levels. However, the federal deficit, which ended fiscal year 2023 at 7.5% of GDP, likely will not be reduced by much in 2024, keeping the 10-year Treasury yield high relative to the past decade, even as inflation eases.

Figure 3: Government Revenue (Deficit) as a Percent of GDP

Note: Data shows central and local government revenues less expenditures expressed as a share of GDP.
Source: Flow of Funds, National Income Product Accounts, Haver Analytics, Oxford Economics, CBRE Research, Q3 2023.

Figure 4: U.S. 10-Year Treasury Yield

Source: CBRE Research, October 2023.

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  • EA is CBRE’s forecasting Research group, comprised of professional economists, data scientists and analytical experts.

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