UMB Economic Outlook Forecasts Mild-Recession Mid-Year

Posted January 25, 2024

UMB Bank released its 2024 economic outlook pointing out several factors that could lead to a “choppy ride” for the year in addition to a mild recession.

The 2024 economic outlook cites many crosscurrents, either current or upcoming, that are going to affect the economy’s fate this year. Inflation is one factor that remains cloudy, according to UMB Bank CIO Eric Kelley.

“The massive rally in financial markets at 2023 year-end has dramatically improved financial conditions, which could prevent inflation from moving lower in a steady fashion. However, if various measures of core inflation don’t behave perfectly, the Fed may be unable to cut rates as quickly as the markets are now predicting,” Kelly said in the report.

While inflation remains uncertain, the softening of GDP is more measurable. Strong consumption boomed in the second half of 2023, which could point to growth rates contracting at least in the middle of the year.

That boom could be correlated to savings accumulated during the pandemic. Approximately $2.3 trillion in savings, according to the Federal Reserve Board. However, while excess savings from citizens bolster consumer spending UMB believes many of those savings are likely to deplete soon, causing the economy to recede.

“Given we are starting the year with 5% yields on average intermediate duration bond portfolios, total returns for 2024 could easily land in the 5-6% range,” Kelley said.

According to the outlook, UMB predicts there is a fair chance of a mini-recession occurring mid-year. If so, inflation rates should continue to fall and unemployment rates could go up, prompting the Federal Open Market Committee to begin cutting rates during the second half of the year.

“If inflation is still above their target (as we think it will be), the Fed is most likely to cut rates in a steady, measured way as they do not want to reignite inflation. We expect overnight rates to have been cut by 1.0% by the end of next year, down to 4.5%,” Kelley said.

Moreover, the U.S. has entered into a presidential election year. Data does not point to a direct correlation between a chance of recession and the results from a presidential election but UMB points out that economic uncertainty leading up to the election could be a means for more turbulence.