2024 Economic Outlook: A Breakdown for Advisors

With half of the year left, the US economy has yet to see any Federal Reserve rate cuts—increasing the likelihood of an imminent downtrend in economic growth. Still, our Morningstar analysts project inflation will fall throughout the year, pushing the Fed to start lowering interest rates toward the end of 2024.

By understanding the latest economic trends, financial advisors can deliver quality advice and help clients capitalize on these forecasts. Our 2024 Economic Outlook explores predictions, trends, and insights for Q2 2024.

To read the full research report, download a copy.

While markets were spooked by weak apparel retail sales for April, this doesn’t yet signal the beginning of a consumer slowdown. It’s always important not to get caught up in the month-to-month noise, especially as consumption data has been particularly volatile over the past few years.

Instead, a more productive approach may be to focus on the year-over-year trend, which is essentially holding steady—we estimate 2.8% year-over-year growth in the three months ending in April. Plus, the uptrend in consumption in 2023 was driven by goods, probably by easing inflation in goods prices.

Housing starts fell by 12% cumulatively from 2021-23 using annual average levels. And despite the partial recovery in the second half of 2023, we expect housing activity to trend down over the rest of 2024, making for another 6% drop compared with 2023.

Altogether, the median mortgage payment as a share of household income has risen from 19% in 2019 to 28% as of 2024—the highest since the housing boom peak in 2005-07. We think current homebuyers are mostly placated by the hope of refinancing on an eventual drop in mortgage rates. Still, mortgage rates will have to fall drastically to justify those hopes. If the Fed doesn’t drive down mortgage rates as we expect, then another leg down for housing prices and activity is very likely in our view.

Two years ago, inflation pessimists pointed to the astronomically high job openings rate as a key reason why the US economy would have to enter a recession in order to bring down high inflation.

Yet we argued that the shift in the Beveridge Curve—the relationship between employment and the job openings rate—during the pandemic was due to temporary disruptions and that job openings would be able to fall without a drop in employment as the labor market normalized, which is precisely what has occurred. This painless adjustment in the job openings rate has played a major role in inflation’s near-complete normalization without any slowdown in employment or economic growth.

After soaring to 6.5% in 2022 (the highest since 1981), inflation dropped to 3.7% in 2023 and we project it to fall further to an average 2.4% in 2024. As supply constraints have alleviated, the same categories that drove the spike in inflation (energy and durables) are pushing inflation back down. The final impetus to ensure that inflation returns to the Fed’s 2% target will be provided by slowing economic growth in late 2024 and 2025. Combined with ongoing supply side expansion, this should push inflation slightly below the Fed’s 2% target in 2025 and 2026.

Total PCE inflation stands at 2.7% year over year as of April 2024. Core PCE inflation stands at 2.8% year over year, lower than the core CPI rate of 3.6%, owing to the PCE’s lower weighting on housing. Housing inflation, at 5.6% year over year in April, is the biggest contributor to continued high overall inflation.

Owing to an upward surprise in recent inflation data, as well as hawkish commentary from the Fed, we’re delaying our expectations for rate cuts. We expect just two cuts this year (in September and December), putting the federal-funds rate at 4.75-5.00% at end-2024. Still, our expectation for the ultimate destination—the federal-funds rate hitting 1.75- 2.00% by end of 2026—is unchanged.

The yield curve also remains inverted, with the 10-year Treasury yield of 4.3% significantly below the 2-year at 4.8%, as well as the federal-funds effective rate at 5.3%. Contrary to popular belief, this inversion is stimulatory for the economy by lowering borrowing costs. The Fed will have to ultimately cut rates in line with expectations to keep financial conditions stable. The mere act of holding the federal-funds rate constant for longer than expected could be contractionary, by causing financial conditions to tighten.

Now more than ever, financial advisors need to identify and understand clients’ unique goals. When you know the possible impact of economic trends on investment opportunities, it can be easier to offer quality advice and meet the evolving needs of clients.

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