US Economy Faces Potential Slowdown: Best's Report

In a special report, A.M. Best said the US economy performed better than expected in 2023, significantly reducing the possibility of a recession in 2024. However, the rating agency said growth is still set to slow due to a variety of headwinds.

According to Best's Special Report, "US Economy: Soft Landing May Experience a Bumpy Road," strong domestic consumption led to the gross domestic product (GDP) growth of 2.5 percent 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 percent on a fourth-quarter basis, bringing positive momentum into 2024.

Inflation continues to move down toward the Federal Reserve's target of 2.0 percent, the report said, 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 percent] of GDP," said Ann Modica, director of credit rating criteria, research and analytics, at A.M. 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, according to the report. 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, said the rating agency.

Copyright © 2024 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED.