Risks to the 2024 Economic Outlook
April 30, 2024
Risks to the 2024 Economic Outlook
The economy in 2023 was characterized by high but falling
resume student loan payments that were frozen during the
inflation, a tight labor market, and moderate to high growth.
2020-2023 moratorium. CRS estimated that at least 38
Many economists predicted that monetary policy tightening
million borrowers with $1.4 trillion in student loans
by the Federal Reserve (Fed) would result in a recession in
outstanding had interest accrual paused during the
2023, but that did not come to pass. While inflation is still
moratorium. (For more details, see CRS In Focus IF12472,
not back down to the Fed’s target, and the path of interest
Federal Student Loans: Return to Repayment, by Alexandra
rates remains uncertain, many economists are no longer
Hegji.) Nevertheless, according to Wells Fargo, various
forecasting a recession in the coming year. (For more
analysts saw little macroeconomic impact because the
information, see CRS In Focus IF12543, Has the Federal
impact is relatively concentrated, with a relatively small
Reserve Achieved a Soft Landing in 2023?, by Lida R.
number of borrowers with large balances. An Oxford
Weinstock and Marc Labonte.)
Economics estimate forecasts that the end of the
moratorium will reduce gross domestic product (GDP)
The 2024 consensus forecast, as is typically the case,
growth by 0.1 percentage points (pp) in 2023 and 0.3 pp in
predicts a fairly moderate path for the economy. When the
2024, and Goldman Sachs forecasts that it will reduce
economy suddenly strays from a moderate path, it is often
consumer spending by 0.2 pp and GDP by 0.1 pp in 2023.
because of economic “shocks”—surprise events that could
positively or negatively affect growth. The pandemic was a
One study found that most of the stock of excess pandemic
recent and extreme example of the effects that unexpected
savings has been drawn down, falling to about 10% of
shocks can have on the economy.
annual disposable income in the second quarter of 2023
after peaking at around 14% at the end of 2021. The
Some surprises, such as COVID-19, cannot be predicted
personal saving rate (i.e., the flow of new savings) has
ahead of time. But there are a few risks to the 2024 forecast
averaged between 3% and 5% of disposable personal
that are more visible at this point. This In Focus details
income since 2022—very low by historical standards. As
selected risks to the economy in the coming year. For more
the stock of pandemic surplus savings is exhausted, the
information on the state of the economy in 2023 and
saving rate may rise back to historical averages, causing
moving forward, see CRS Report R48054, State of the U.S.
spending to fall. The effect on spending may be tempered
Economy: Policy Issues in the 118th Congress, by Marc
by the fact that almost half of excess savings was held by
Labonte and Lida R. Weinstock.
households in the top income quartile at the end of 2022,
according to one estimate.
Geopolitical Risks
Geopolitical risk is a common source of macroeconomic
Figure 1. Estimates of Pandemic Excess Savings
disruptions. Ongoing foreign wars could lead to new
January 2020 to September 2023
disruptions in commodity prices or supply chains. For
example, recent supply chain disruptions due to attacks on
ships in the Red Sea have increased shipping costs and have
some economists worried about a resurgence in supply-
driven inflation.
Rebalancing Risks
Other risks are related to the rebalancing of the economy
following the pandemic disruption, including the shift from
a very low interest rate environment to the highest interest
rate environment that the economy has experienced since
before the 2008 financial crisis. There are risks that
borrowing or investment positions that were viable when
rates were lower are no longer viable now that rates are
high. This poses a downside risk to the economy, because
Source: Data taken from FEDS Notes, An Update on Excess Savings in
businesses and consumers may reduce spending more than
Selected Advanced Economies.
expected in response to higher rates, or financial institutions
Note: Each line represents a different estimate of excess savings
may experience higher losses than expected.
based on researchers using three different methodologies.
Another rebalancing risk is that consumers could retrench
Financial Risks
on spending due to the strain on their finances as they
In terms of higher interest rates and financial conditions,
exhaust their surplus savings from the pandemic and
there are a number of risks.
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Risks to the 2024 Economic Outlook
First, the Fed reports that asset prices are currently high
were already at its mandatory minimum equity level, then it
relative to fundamentals. Financial asset and house prices
would not be allowed to increase its leverage.
have been resilient to higher rates overall so far. Asset
values should fall (all else equal) when rates rise, because
One sector of particular concern is commercial real estate
future cash flows are worth less on a present discounted
(CRE). The pandemic resulted in a structural shift away
value basis. Other market forces may be affecting asset
from in-office work, resulting in high vacancy rates for this
values, causing some to hold value. For example, house
segment of CRE that persist today. Due to the convergence
prices are likely holding value as a result of lagging supply
of work-from-home policies and other economic pressures,
conditions in the housing market. (For more information,
many companies that would typically rent space from the
see CRS Report R47617, U.S. Housing Supply: Recent
office subsector of CRE owners are not renewing their
Trends and Policy Considerations, by Lida R. Weinstock.)
leases. This is evidenced by office vacancy rates, which hit
There are multiple explanations—rational and irrational—
all-time highs earlier this year. Consequently, office
as to why asset prices are high relative to fundamentals, but
property leases have fallen, generating lower revenues from
it increases the risk that asset prices may fall. A sudden and
rent, potentially imperiling the ability of the property
steep decline in, say, stock prices or house prices could
owners to pay back financing costs. To minimize losses,
potentially undermine consumer, business investment, or
some CRE owners have been willing to break leases and
residential investment spending. Falling asset prices have
renegotiate terms with tenants.
been a cause or at least a feature in multiple past recessions,
most starkly in the 2008 financial crisis, which
Such stress in the office subsector might stress banks that
demonstrates that in the worst-case scenario, falling asset
hold a significant amount of CRE debt on their books. As of
prices can cause financial instability.
January 2024, banks in total hold around $3 trillion in CRE
debt, with some banks having more concentrated holdings
Second, household and business debt grew when rates were
than others. CRE mortgages are financed on shorter terms
low and liquidity was overly abundant. Higher rates
than are residential mortgages, often with balloon payments
increase the costs of debt service, which might cause
due at maturity. Trepp, an industry analysis firm, estimates
financial stress for debtors or lead them to reduce their
that $544 billion in CRE loans will mature in 2024, with a
consumption spending. Nonfinancial business debt peaked
little more than half of that coming from bank and thrift
relative to GDP in 2020 and remains higher than it has been
loans. Further, regarding the retail subsector, many
in previous decades. Debt service costs for these businesses
tenants—some of whom were also affected by post-
were low following the pandemic because rates were low,
COVID-19 structural shifts—are considering whether or
but they are now rising. Household debt is lower than
not to renew their leases. A loss of rental income would
during the financial crisis but higher than in the 1980s or
lead to higher default rates among CRE owners. This is
1990s relative to GDP, and households are no longer
compounded by the coinciding maturities of many CRE
benefiting from pandemic debt relief programs, such as the
mortgages, which will accelerate defaults if rental income
student loan moratorium discussed above. Loan
cannot sufficiently offset the balloon payment obligations
delinquencies and defaults are low but are now rising across
or if alternative financing cannot be procured. (For more
a number of asset classes.
information, see CRS Insight IN12278, Bank Exposure to
Commercial Real Estate, by Andrew P. Scott; and CRS
Third, financial institutions may realize higher-than-
Insight IN12283, Commercial Real Estate Markets and
expected losses on their asset holdings as a result of high
Potential Macroeconomic Stress, by Lida R. Weinstock and
interest rates, slower growth (in a soft-landing scenario), or
Andrew P. Scott.)
specific problems in narrower sectors. For example, three
large banks failed in 2023 in part because high rates led to
Finally, the long-term relative shift in credit provision from
losses on debt securities or mortgages they held and
banks to nonbank financial institutions (sometimes called
because deposits were less “sticky” and plentiful in a
“shadow banking”) since the 2008 financial crisis may have
higher-rate and tighter-credit environment. A key feature of
increased or decreased systemic risk in unpredictable ways,
the 2023 bank failures was large and sudden deposit
in part because it has reduced risk transparency.
outflows, particularly by uninsured depositors.
Interest rates and economic conditions cause—and are
Other banks face similar challenges, with falling asset
caused by—each other (i.e., they are “endogenous”), so
values and rising delinquency rates. Further failures could
high rates will not necessarily result in a recession. If
potentially disrupt financial stability, or further losses could
growth falters because rates are high, rates are likely to fall,
lead to a reduction in the availability of credit through
especially if inflation becomes well contained. If rates fall,
“leveraged losses.” Banks and some other financial
the pressures on borrowers and financial institutions
intermediaries are leveraged, meaning that their debt levels
described in this section would somewhat subside.
greatly exceed their equity levels. Losses can force such
Therefore, a sudden and unexpected shock (e.g., a failure
intermediaries to sharply reduce their lending in order to
that leads to broad financial turmoil) is more likely to lead
maintain a stable relationship between their debt and equity.
to a recession than is the gradual and orderly adjustment to
If losses reduce equity and the institution cannot or does not
higher rates.
want to raise more equity, then the institution’s overall
balance sheet must drop by a multiple of that loss to
Lida R. Weinstock, Analyst in Macroeconomic Policy
maintain existing debt-to-equity ratios. If the institution
Marc Labonte, Specialist in Macroeconomic Policy
IF12649
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Risks to the 2024 Economic Outlook
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