Scenarios
Baseline (70%): The economy’s strength in recent months is broad-based, with strong growth in all subcategories of GDP. We expect that strength to moderate a bit in the coming months, but the story is still positive overall. Consumer spending, investment, and government spending will all grow by at least 2% in 2024; exports will grow by more than 4%. Consumer price index inflation falls below the 3% threshold in the first quarter of 2024, though it remains close to that level for the first half of the year. The Federal Reserve succeeds in walking the tightrope to a soft landing by cutting rates twice in the second half of 2024 and continues with cuts until reaching the neutral rate of 2.5% to 3%. Job growth slows because current levels of job formation are not sustainable, given demographics and labor force participation. The unemployment rate peaks at 3.9% in 2024 before gradually declining, thanks to persistently tight labor markets. Major investments prompted by the Inflation Reduction Act provide a boost to manufacturing at home.2 Abroad, current geopolitical risks simmer but do not explode into larger regional conflicts.
Overall, despite an expected slowdown in the coming quarters, we expect the US economy to post real growth of 2.4% this year and 1.4% in 2025. Over the entire forecast, economic growth averages 1.8% per year, slightly higher than the long-term potential of 1.5% per year.
Escalation of geopolitical conflicts (20%): While today’s global conflicts have not yet resulted in direct engagement of significant American military forces, there is heightened risk that the United States could be brought into a significant conflict before the end of the decade. We appear to be entering an era of heightened geopolitical risk as conflicts involving American adversaries flare up in different regions of the globe. We have, therefore, included a scenario that examines the impact of geopolitical conflict on the American economy.
Geopolitical tensions increase as wars in Europe and the Middle East escalate, resulting in disruptions to trade and economic activity in the second half of this year. In this scenario, Eurozone GDP is flat in 2024 and declines by 0.3% in 2025. This, in turn, impacts the US trade balance as fewer American exports flow to one of its major customers. The escalating conflicts also lead to a significant increase in the price of oil. As a net oil exporter, the United States stands to benefit in some ways from oil price increases. But the magnitude of the increase has a knock-on effect on firms and households, and it helps to hold inflation higher for longer.
As the United States gets brought into the regional conflict, defense spending receives a boost. This acts to counteract some of the negative impacts from the Eurozone economic downturn and higher oil prices, as the defense spending is economically stimulative. While this mitigates the magnitude of the downturn, economic growth slows. Adjustment costs to the new circ*mstances and higher capital costs, as the US government borrows for defense spending, reduce capital formation over the forecast horizon. From 2024 through 2028, GDP will increase by an average of 1.6% per year, 0.2 percentage points slower than in the baseline forecast but still above the long-term potential—albeit barely.
A golden era for labor markets (10%): Artificial intelligence is today’s popular buzzword, but the increasing sophistication and availability of technology and software has already been replacing some jobs and creating new ones. This kind of transformation will continue—and since technological change is not always linear, there is always the possibility of fast changes that help boost productivity significantly. In this scenario, the average annual growth of labor productivity grows at an average annual rate of 1.9% per year from 2024 through 2028, compared to 1.6% in the baseline.
In addition to the productivity dividend, population growth increases from an average of 1.6 million per year in the baseline to 2.1 million per year. As a result, the population will be 2.4 million larger by 2028. Labor force participation rates will be higher than in the baseline as older workers postpone retirement. With a larger population base, as well as a workforce working longer over time, there will be more people looking for employment—and with demand remaining strong, they will find it. Total employment levels will rise, with faster growth in the outer years of the forecast.
In this scenario, GDP will rise faster than the baseline forecast over the entire forecast horizon. From 2024 through 2028, GDP will increase at an average annual rate of 2.4% per year, 0.6 percentage points higher than the baseline forecast. This scenario also results in higher long-term potential for the economy at 2.3%, compared to 1.5% in the baseline. In that sense, this scenario shows what it would take to make recent rates of economic growth sustainable in the long run.
