The U.S. economy performed better than expected in 2023, significantly reducing the possibility of a recession in 2024. However, according to a new AM Best report, growth is still set to slow due to a variety of headwinds.

According to the Best’s Special Report, “US Economy: Soft Landing May Experience a Bumpy Road,” strong domestic consumption led to the GDP growth of 2.5% in 2023, aided by a tight labor market, growth in real incomes and positive wealth effects from the housing and stock markets. Government spending also contributed to economic activity, owing to the passage of the Inflation Reduction Act and the Chips and Science Act, which boosted federal spending. Private investment and exports had mixed results, but the economy still ended on a positive note, growing by an annualized 3.3% on a fourth-quarter basis, bringing positive momentum into 2024.

The report also notes that inflation continues to move down toward the Federal Reserve’s target of 2.0% and is likely to continue to fall in the upcoming year. However, the risk that inflation may spike persists given the precarious geopolitical environment. Various conflicts around the world have the potential for supply chain disruptions and commodity price shocks, which would increase costs and cause higher inflation.

“As the Fed was tightening policy to rein in inflation, the government undertook expansionary fiscal spending with fiscal deficits running approximately 7%-8% of GDP,” said Ann Modica, director, credit rating criteria, research and analytics, AM Best. “If fiscal deficits continue to grow, policy rates are likely to remain higher due to the inflationary impact. Additionally, public debt is becoming a larger concern, with interest payments almost twice as much as they were three years ago.”

Interest rates may be at or near their peak, according to the report, with the Fed projecting rate cuts totaling 75 basis points in 2024. With the rate cuts, mortgage rates are expected to come down as well. However, monetary policy may remain somewhat restrictive, given its lagged effect. Consumer spending, which remains the main driver of US economic activity, likely will moderate in 2024. The expected economic slowdown, dwindling savings, rising debt levels and a weaker employment outlook all have the potential to lead to a decline in domestic consumption.

To access the full copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=340405.

For a video discussion about this report with Ann Modica, director, AM Best, please visit http://www.ambest.com/v.asp?v=ambeconomy224.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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