Global Markets Research

Special Report 2 January 2024

Economics - North America

Research Analysts
US: 2024 Economic Outlook North America Economics
Aichi Amemiya - NSI
[email protected]
+1 212 667 9347

This report is excerpted from and expanded on our 2024 Global Annual Economic Jeremy Schwartz - NSI
Outlook: Forging a new path (published in December 2023). [email protected]
+1 212 667 9637
Ruchir Sharma - NSI
US growth momentum is slowing following the surprising resilience in 2023. We expect [email protected]
real GDP growth to average close to zero for 2024, with a below-trend average of 1.3% in + 1 212 667 9186

H1 ahead of a mild recession in H2 . Tight financial conditions will weigh on the cyclical
sectors and lead to strains on private sector balance sheets. Disinflation is likely to
continue through 2024, but progress could be uneven. Wage growth, in particular, is likely
to remain elevated, raising the risk of an eventual inflation reacceleration or ‘last mile’
inflation persistence. Disinflation, sluggish growth, and FOMC’s recent dovish shift
towards balanced risks, will likely lead to a pre-emptive rate cut of 25bp in June 2024 ,
but an aggressive rate cutting cycle seems unlikely until a recession starts in H2 2024.
We expect the Fed to begin a 25bp per meeting cutting cycle and halt balance sheet
reduction once a recession is underway in September.

Fig. 1: US growth momentum is slowing, and we expect a Fig. 2: We expect the first rate cut in June 2024, followed by a
recession to begin in H2 2024 faster pace of easing once recession is underway

Source: BEA, Haver, Nomura

Source: FRB, Bloomberg, Nomura

Production Complete: 2024-01-02 22:23 UTC

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Special Report 2 January 2024

Slowdown, recession and last mile inflation

risk
Growth momentum is slowing
After surprising strength in 2023, growth momentum appears to be cooling. Financial
conditions have eased recently, but remain restrictive, which will likely exert downward
pressures on the economy with a lag. Households and businesses have been well-
insulated from rising interest costs so far, but higher borrowing costs will increasingly
weigh on cyclical spending.
Mortgage rates remain elevated, and this is likely to lead to renewed weakness in housing
markets. Homebuilder sentiment has declined sharply, and we see early signs of a
slowdown in single-family construction and new home sales. Multifamily construction was
already trending lower before the latest tightening in financial conditions, and we expect
further weakness in 2024.
Equipment investment has already turned negative, and headwinds are likely to intensify.
Interest costs for businesses will continue to rise, and credit conditions (particularly from
bank lending) have tightened. We expect business financial stress to intensify throughout
the year, with default rates continuing to rise. Slowing growth and inflation will also likely
lead to a deceleration in revenues, with a strong dollar adding additional headwinds to
multinational corporations and export-driven businesses. Regional Fed surveys show
forward-looking capex plans have slowed for both manufacturing and services.
In addition to looming headwinds, some one-off positive shocks for capex are likely to
fade. Industrial policy from CHIPS and the Inflation Reduction Act (IRA) led to a surge of
investment in the tech sector in 2023. We do not expect a sharp reversal, but the fastest
pace of increase has likely passed. In addition to fiscal support, supply-chain stress in
2021-22 led to back-loaded strength in spending in 2023 (as many businesses wanted to
invest, but equipment only became available with a lag).
The labor market is beginning to cool
Labor markets have slowed significantly, even without a sharp growth downturn or
widespread layoffs. The monthly run-rate for nonfarm payrolls has decelerated to below
200k — in line with its pre-pandemic average — and the unemployment rate has drifted
higher to 3.7%.
So far, this slowdown appears to be a normalization after frenzied hiring and labor
hoarding in 2021-22. Measures of hiring and labor demand have moderated, and the pace
of layoffs has increased modestly.
Taken together, slower hiring and a faster run-rate for layoffs suggest a further increase in
the unemployment rate. We expect the unemployment rate to move above 4% in H1 2024,
with a sharper increase only occurring later after the onset of recession.
Slowing growth will put pressure on employment in cyclical sectors, however hiring in non-
cyclical sectors remains robust (Fig. 3 ). We expect solid growth to continue through H1
2024. The overall level of employment in these sectors is below the pre-pandemic trend,
and job openings remain elevated for these industries, suggesting steady employment
growth can continue.
We expect wage growth to only slow gradually, remaining above its pre-pandemic
averages through 2024 (Fig. 4 ). Wages tend to lag tight labor markets and rapid nominal
GDP growth. This suggests some back-loaded strength is likely, despite a broader growth
slowdown. Real wages will likely accelerate, making up some ground after low or negative
growth throughout most of the post-pandemic recovery.

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Fig. 3: Slowing growth to put pressure on employment in Fig. 4: Wage growth to only slow gradually, remaining well
cyclical sectors, but hiring in non-cyclical sectors remains above the pre-pandemic run-rate throughout 2024
robust

Source: BLS, Haver, Nomura

Source: BLS, BEA, NBER, Haver, Nomura

Consumers are resilient, but growth is moderating

Solid labor income growth will likely support consumer spending. Tighter financial
conditions are a strain for households, but this is more likely to lead to a slowdown than
an outright downturn in the near term.
Household balance sheets have been well insulated from higher rates and tighter financial
conditions (Fig. 5 ). Around 70% of household debt is mortgage borrowing, which is
overwhelmingly fixed-rate debt still paying low rates. Despite home price appreciation and
rising homeownership rates, mortgage debt payments are still below 2019 levels as a
percentage of disposable personal income.

Fig. 5: Household balance sheets have been well insulated Fig. 6: Headwinds are building, which will strain household
from higher rates and tighter financial conditions finances

Source: BEA, Haver, Nomura

Note: Debt service ratio measures monthly mortgage payments as a % of disposable
personal income
Source: Freddie Mac, BEA, Federal Reserve, Nomura

Despite this solid foundation, headwinds are building for household finances (Fig. 6 ).
Most household liabilities are insensitive to rising rates, but credit card interest costs are
increasing, and delinquency rates have picked up. The resumption of student loan

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payments (following years of forbearance) is also a drag on household cashflows. (It is

noteworthy that total non-mortgage interest payments appear on track to surpass
mortgage interest this winter.)
Consumer surveys demonstrate that higher borrowing costs and tighter lending conditions
are weighing on demand for vehicles and other large durable goods. The University of
Michigan consumer sentiment survey showed a sharp rise in the share of households that
claim it is a bad time to make large purchases due to high interest rates. Rejection rates
for consumer credit applications have also increased, and a rising share of households
indicated that they have been discouraged from even applying for credit.

Box: Hard data vs Soft data

Survey data have been an unreliable gauge for growth in recent years. Widely tracked indicators like ISM
manufacturing and the University of Michigan consumer sentiment have been deeply negative since mid-2022 – even
as hard data on spending and production remained resilient. The degree of divergence is significant, but not
unprecedented (Fig. 7 & 8 ).
It is difficult to pinpoint the drivers of soft data underperformance, but we see evidence for several possible
explanations.
• Elevated inflation and supply shortages might have weighed down on consumer sentiment in the pandemic
recovery. For decades pre-pandemic, headline sentiment was driven by household finances and labor market
conditions. That said, historically, high and volatile inflation may also push sentiment lower (Fig. 8 ).
• Conversely, temporary factors such as excess savings or mending supply chains might have boosted spending
and production, in spite of poor sentiment.
• On the business side, higher interest rates, tighter credit conditions, and market uncertainty might be affecting
survey responses. Historically, ISM manufacturing has been highly correlated with changes in financial conditions,
beyond what FCI might imply for growth (Fig. 7 ).
• Extreme macroeconomic volatility in the pandemic might also confound survey responses. Survey respondents are
likely somewhat imprecise about rates vs. levels and the appropriate baseline to gauge economic conditions. In
normal times, this is mostly inconsequential, but large cyclical fluctuations in 2020-22 may have worsened the
slippage between vague surveys and precise hard data

Fig. 7: Tighter financial conditions weigh more on Fig. 8: The decline in sentiment due to inflation concerns
surveys has been slightly offset by a strong labor market
FCI_G: Financial Conditions index publishes by FRB

Source: University of Michigan, NBER, Haver, Nomura

Source: FRB, ISM, NBER, Haver, Nomura

With inflation moderating, we expect consumer surveys to be more reliably correlated with labor market and spending
data. Similarly, the extreme volatility of the pandemic has moderated, simplifying the connection between diffusion
indices and growth measures. Financial conditions are likely to remain restrictive, but at least the pace of tightening
has moderated. That should mean business surveys could at least provide a useful signal for second derivative
momentum swings.
We are cautious about relying too heavily on surveys as we forecast a momentum slowdown and eventual recession.
However, we continue to believe soft data provide valuable information, especially when they are corroborated by a

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broader range of indicators.

Disinflation is underway
We believe disinflation will likely continue in 2024 and forecast core PCE inflation to
decelerate to 2.3% in Q4 2024 from 3.2% as of November 2023 (Fig. 9 ). Disinflationary
forces appear to be concentrated in vehicle prices and rent (Fig. 10 ), while we expect
inflation of supercore components to moderate more gradually.

Fig. 9: We expect disinflation to continue in 2024, with the Fig. 10: Private rent data point towards continuing
slowdown concentrated in vehicle prices and rent deceleration through 2024

Source: BEA, Haver, Nomura

Note:
Source: BLS, Zillow, Apartment List, Haver, Nomura

Higher interest rates started to drive down vehicle prices, which make core goods prices
one of the primary sources of disinflation (Fig. 11 ). Used vehicle prices have been one of
the largest inflation drivers since the pandemic and appear to be sensitive to changes in
credit conditions for auto loans. The delinquency rate for subprime auto loans continued to
increase and banks’ lending standards for those loans have been tightening. As buyers
with lower credit scores historically tend to buy used vehicles, the impact of tighter credit
conditions should exert substantial downward pressure on used vehicle prices (Fig. 12 ).
New vehicle markets have been more resilient, but there seems to be scope for further
increases in rebate sales incentives for automakers. By contrast, non-auto core goods
prices might be supported by higher import prices in response to a weakening US dollar
(please refer to our FX research team’s forecast .) However, the magnitude of expected
declines in vehicle prices will likely outweigh the positive impact from higher import prices.

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Fig. 11: Disinflation of core goods prices is underway Fig. 12: The impact of tighter credit conditions should exert
substantial downward pressures on used vehicle prices

Source: BEA, Haver, Nomura

Source: BLS, FRB, NBER, Haver, Nomura

Leading indicators point towards continuing deceleration in rent inflation through 2024 (
Fig. 10 ). Private rent data remain weak and over-supply of apartment buildings in certain
metropolitan areas have pushed up the rental vacancy rate. Moreover, historically, rent
inflation has been cyclical and weak income growth should prevent a strong rebound.
Note that the relative importance of vehicle prices and rent in core CPI is larger than in
core PCE price index. Expected moderation in vehicle prices and rent inflation will likely
have a larger disinflationary impact on core CPI than core PCE inflation.
The remaining part of core inflation is non-rent core service prices, so-called supercore
inflation. CBO and CMS forecasts for cost increases for Medicare services point to stable
inflation for healthcare service prices (please see our discussion on healthcare service
prices ). However, about one-third of supercore components such as food service prices
seems to be sensitive to wages (please see our report on wages and inflatio n ). Based on
our analysis, wage growth tends to be sticky and thus those wage-sensitive prices will
likely moderate more gradually than rent and core goods prices. We expect supercore
PCE inflation to fall to 3.1% y-o-y in Q4 2024, from 3.5% in November 2023.
Last mile risks
Realized inflation is falling, but there will be lingering risks of a reacceleration. We think
wage growth and hence supercore inflation provide an important guide for assessing
these risks. Many policymakers (including Chair Powell) have argued that any evidence
that tightness in the labor market is no longer easing could put further progress on inflation
at risk, which underlines the importance of labor markets and wage growth for the inflation
outlook (Fig. 13 ).
One lesson from the 1970s inflation was not to declare victory prematurely without broad
corroboration that both inflation and wage growth have slowed (Fig. 14 ). In the 1970s, a
series of shocks (including the two oil crises and depreciation of the US dollar associated
with the end of the Bretton Woods exchange rate regime) exerted inflationary forces. The
Fed tightened policy to prevent a positive output gap, but did not remain restrictive enough
to address building demand pressures in wage growth and persistent services inflation.
Prices reaccelerated and expectations became unanchored, leading to a prolonged period
of high and volatile inflation.

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Fig. 13: Inflation risks are elevated as long as wage growth Fig. 14: The 1970s inflation cautions against premature easing
remains strong

Note: AHE is for private production and nonsupervisory workers

Source: BEA, BLS, Haver, Nomura
Source: BLS, BEA, FRB, Haver, Nomura

Fed is done hiking, but aggressive rate cuts are unlikely as long as growth remains
resilient
Disinflation and sluggish growth are likely to discourage the Fed from hiking rates further,
and we expect a tentative start to rate cuts in June 2024 . However, we believe the Fed
would not be comfortable easing aggressively until inflation and wages decelerate more
decisively.
Pre-emptive easing makes sense in theory, and a simple Taylor rule would suggest this is
a reasonable response to falling (but still above-target) inflation. Some Fed officials have
begun to advocate this approach, most notably Governor Waller, who claimed that lower
inflation would be a sufficient reason to lower policy rates.
In our view, it will be difficult for the Fed to ease quickly as long as growth is solid and
realized inflation remains above target. We see two key uncertainties that should
discourage aggressive rate cuts until a recession is underway.
First, as the prior sections suggest, inflation risks will likely remain skewed to the upside
even when realized core PCE is printing close to the Fed’s target. It is always difficult to
distinguish between temporary, volatile drivers of inflation and structural trends. Our
inflation forecast for 2024 suggests disinflation will be driven mostly by noisy goods prices
and backward-looking rents, raising the risk that ‘underlying’ inflation is still elevated.
Second, rate cuts would raise the risk that policy becomes accommodative. Rates are well
above the Fed’s model-based estimates of ‘neutral,’ but these models are unreliable in
real time. Small differences in assumptions lead to significant differences in estimates
across models. By design, these models tend to assume neutral rates are slow moving,
rendering them incapable of picking up a regime shift until many years after the fact
(please see Special Report - US: Seeing stars ).
It is unclear whether neutral rates have shifted, but risks appear skewed higher (Fig. 15 ).
The past few years have seen growth, inflation, and labor data all less responsive to policy
rates than the Fed and many forecasters had expected. This may just be due to temporary
positive shocks, or unusually long policy lags, but it’s also possible that dramatic fiscal
expansion in the pandemic and significant private sector balance sheet repair could lead
to structurally higher interest rates.
In the past, rate cuts outside recessions have been limited, and were often preceded by
financial stress (Fig. 16 ). Since rate decisions were made public in 1994, there have only
been three instances of non-recessionary rate cuts, in 1995, 1998, and 2019 — following
the Mexican peso crisis, LTCM, and QT-related money market stress. In each case, there
was only 75bp of cumulative easing. Without salient financial stability risks, the pace and
magnitude of pre-emptive rate cuts will likely be limited.

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Fig. 15: Rates are well above the Fed’s estimate of ‘neutral,’ Fig. 16: In the past, non-recessionary cutting cycles have
but R* models are unreliable in real time been limited, and were often preceded by financial stress

Source: NY Fed, Richmond Fed, Federal Reserve Board, Haver, Nomura

Source: FRB, Haver, Nomura

Why a recession is likely

Tighter financial conditions have not led to acute stress yet, but in our view, the risk of a
downturn remains elevated.
The Fed’s aggressive rate hikes and slowing inflation are raising real interest rates. In
addition, the economy is slowing, weighing on revenue growth of US businesses.
Refinancing maturing corporate debt in 2024 and subsequent years will also increase the
debt burden on businesses gradually. The banking sector is still facing pressures as
interest margins for small banks have continued to be squeezed and the Senior Loan
Officer Opinion Survey (SLOOS) points to slower loan growth in coming quarters. Against
this backdrop, credit conditions for the business sector continue to tighten, which
corroborates recent increases in the speculative corporate bond default rate (Fig. 17 ).

Fig. 17: Credit conditions for the business sector continue to Fig. 18: The interest coverage ratio, a measure of the
tighten, which corroborates recent increases in the capability of businesses paying interests, started to
speculative corporate bond default rate deteriorate this year

Note: % of banks tightening standards for C&I loans to large firms, and trailing 12m HY
default rate Note: The interest coverage ratio is defined as corporate profits before tax without IVA
Source: Federal Reserve, Moody's, Haver, Nomura and CCAdj divided by interest paid by domestic nonfinancial corporate business. 2023
figure is estimated based on corporate earnings, US effective banks' lending rates and
corporate loans and debt securities through Q32023.
Source: BEA, FRB, FDIC, Haver, Nomura

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Based on our calculation, the interest coverage ratio, a measure of the ability of
businesses to pay interest, started to deteriorate this year (Fig. 18 ). Historically, changes
in the interest coverage ratio tend to affect certain types of business investment with a
one-year lag. Overall, we will likely see a more substantial impact from credit tightening on
business investment in coming quarters, causing a capex-driven recession in H2 2024.
The Fed can cut quickly and end QT when a recession is underway
Once a recession is underway, the Fed’s employment and inflation mandate are both
likely to suggest policy can ease.
Even in a mild recession, unemployment is likely to rise significantly. We expect the
headline unemployment rate to rise towards 5% by the end of 2024, and increase to a
peak in the mid-5% range by 2025. Wage growth tends to be sticky early on in recessions,
but it predictably declines after a sufficient lag.
We expect a recession in H2 2024 would likely push down supercore PCE inflation to its
pre-COVID level in 2025. Additional disinflationary forces stemming from a recession
should make the Fed confident that the risk of inflation rebounding has diminished,
enabling it to launch a large scale rate cutting cycle in September 2024, along with an end
to quantitative tightening.
We expect the Fed to end balance sheet rundown during a recessionary cutting cycle.

Box: End point of QT is contingent on economic outlook

At the post-July FOMC press conference , Chair Powell mentioned that the Fed could continue balance sheet runoff,
aka “quantitative tightening (QT)” while lowering the policy rate. Since then, market expectations have shifted and
market participants have pushed out the expected date when QT will stop (Fig. 20 ). Under our current outlook, we
expect QT to end in September 2024 once a recession is underway.
Historically, balance sheet policy has been used for both macroeconomic and technical objectives. The scenario laid
out by Powell in July suggests the Fed would be focusing on technical reserve management, allowing the balance
sheet to ‘normalize’ even as policy rates move in the opposite direction. In our view, this approach could make sense
against the backdrop of ‘insurance cuts.’ Interestingly, the July FOMC minutes revealed the Fed’s staff abandoned
their mild recession scenario and presented a more sanguine economic outlook.
However, under a recession scenario, we think it is unlikely for the Fed to continue quantitative tightening. When
downside risks to the economic outlook emerge and market risk sentiment deteriorates, market participants might see
the Fed as being insufficiently flexible in adjusting monetary policy if the balance sheet runoff continues. Changes in
market perceptions about the degree of the Fed’s flexibility could accelerate risk-off trades in markets and lead to
unwelcome tightening in financial conditions. One research report from the Atlanta Fed suggests the impact of QT
varies significantly, depending on the degree of risk aversion of market participants. This was evident with market
reactions to Powell’s comments on QT in December 2018, which suggested that QT would continue to proceed on
autopilot deteriorated market sentiment substantially.
Fig. 19 shows our expectation for balance sheet policy under a range of growth and market scenarios. In our base
case, we forecast the combined size of reserves and overnight reverse repo operations will decrease to $3.3trn or
11.4% of GDP by September 2024 and then slow very gradually thereafter (Fig. 21 ). Our forecast suggests the level of
reserves will likely remain “abundant” in the banking system. It’s a close call, but we expect the Fed to reinvest the
proceeds from maturing mortgage backed securities (MBS) into Treasuries because we do not anticipate any specific
stress in mortgage markets or housing.
As we discussed in the main section, there is a significant risk of the economy avoiding a recession. Under such a soft-
landing scenario, QT would likely continue. Conversely, if a recession becomes more severe, the Fed would not only
stop QT but also roll over its MBS holdings. We think the Fed’s balance sheet policy is flexible, depending on the
economic outlook.

Fig. 19: Nomura: the Fed's balance sheet policy scenario for 2024

QT ends QT continues
Recession No recession
Severe Recession Mild Recession Reserve Scarcity No reserve scarcity
MBS reinvested into MBS MBS reinvested into Treasuries QT Continues
15% 45% 5% 35%
Source: Nomura

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Fig. 20: Evolution of market expectations for the timings Fig. 21: Nomura's forecast for the combined size of bank
of QT end and first rate cut reserves and ONRRP

Source: FRB, Haver, Nomura

Note: Based on the Survey of Market Participants
Source: New York Fed, Nomura

Fiscal policy on hold

With divided government and a national election looming in November, we do not expect
any significant fiscal easing in response to a recession. 2024 is an election year and the
administration cares about slowing growth. However, House Republicans likely have less
incentive to support policy that boosts the economy. Inflation risks and concerns of
elevated deficits might dampen support for stimulus, even among Democrats.
At the state level, we expect strong property tax collections and replenished rainy day
funds to support state and local government spending.

Box: 2024 Election Outlook

There is significant uncertainty around the 2024 election, and polling data are usually unreliable this far in advance.
Historically unpopular candidates, an unusual economic backdrop, and potential third-party candidates suggest a wide
probability distribution for the national election outcome.
Recent election trends and structural features of the US political system help to narrow down the most likely outcomes
though. We see two main takeaways:
1. A unified (single-party) government is our most likely outcome, but it is a close call, leaving a high probability of
divided government and continued gridlock.
2. A Republican president would be more likely to preside over a unified government.

The party that wins the presidency is likely to also gain control of the House of Representatives, where all 435 seats
will be up for election in 2024. In recent decades, voters have tended to vote for the same party in the Presidential and
Congressional races, making the outcomes increasingly correlated. Based off district maps and past election results,
we believe Republicans likely have a slight advantage in a close election, but this margin has diminished in recent
years. Fig. 22 shows House seat margins compared with the House popular vote. In 2012-20, Republicans would
often win a greater share of seats than aggregate vote totals would suggest (including 2012, where they won a majority
despite receiving fewer votes). However, in 2022 Democrats actually slightly outperformed.
The Senate will be an uphill battle for Democrats. Only one-third of Senate seats come up for election every two years,
and the race in 2024 is favorable for Republicans (Fig. 23 ). 23 of the seats up for election are currently held by
Democrats, compared with just 11 for Republicans. Democrats are very likely to lose an open race in West Virginia,
and will have to defend two seats in states that Trump won in 2020. Democrats will also be defending five seats in

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states that Biden won by less than 2.8%. The most vulnerable races for Republican incumbents are in Florida and
Texas, where Trump won by 3.4-5.6%.
If a Republican wins the presidency in 2024, we think it is almost certain that Republicans will also gain control of the
Senate (note that if the Senate is tied 50-50, then the Vice President casts the deciding vote). If a Democratic president
wins by a clear margin, then there is a strong likelihood that Democrats can maintain their Senate majority, but it is far
from certain (they would need to run the table in close races or win an unlikely victory in a solidly Republican state). If
Democrats win the presidency by a narrow margin, Republicans would likely be favored to take the Senate regardless.
We see a 40% probability of a unified Republican government, a 35% probability of a split government with a
Democratic president, a 15% probability of a unified Democratic government, and a 10% probability of a split
government with a Republican president.
The 2024 election outcome will likely have a direct impact on tax policy in 2025, as the Trump-era tax cuts are set to
expire. There has been some bipartisan support for extending some provisions, but the extent to which the tax cuts are
extended depends on whether Republicans win a unified government.

Fig. 22: Republicans likely hold a structural advantage in Fig. 23: Democrats have an uphill battle in the Senate,
the House race currently holding the most competitive races

Note: A positive margin represents a Republican majority. A negative margin Note: R equals Republican and D equals Democrat.
represents a Democratic majority. Source: University of Virginia, Nomura
Source: MIT Election Lab, Nomura

Risk scenarios to our economic outlook

Soft landing is a risk
The drag from tight financial conditions makes a recession seem more likely than not,
however a soft landing remains a risk.
Cyclical spending has already fallen significantly since the start of the tightening cycle,
and it is possible that demand stabilizes even if financial conditions remain restrictive. In
particular, we will be attentive to any signs of a structural ‘floor’ for residential investment
or business capex. In addition, strong balance sheets of households might provide more
support to the broader economy than we currently assume.
Potential changes to the Fed’s reaction function
Since late 2021, the Fed has been prioritizing the inflation leg of its dual mandate. Officials
have repeatedly said that returning inflation to 2% was their priority, and that they would
do whatever was necessary to achieve this objective.
Since October, there have been signs of wavering. Chair Powell admitted that the FOMC
started to discuss rate cuts in 2024 at the December meeting, and he did not push back
against aggressive market prices of five to six 25bp rate cuts at his post-FOMC press
conference. Moreover, at the December meeting, Powell and FOMC participants appear
to have become less concerned about inflation risks as the number of FOMC participants
that saw the balance of risks to their core PCE inflation forecast as being neutral

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outnumbered the number of FOMC participants seeing upside risks for the first time since
Q1 2021.
Overall, Our forecast for Fed policy in 2024 assumes the emphasis on inflation will persist,
but the risk of a more aggressive dovish pivot has increased. Importantly, due to policy
lags, disinflation and sluggish growth will likely persist for at least a few months regardless
of the Fed’s policy approach even if easing financial conditions exert renewed inflationary
pressures with a lag. In our view, this would risk an inflation reacceleration in the medium
term, but there is no near-term circuit breaker that would prevent the Fed from easing
policy or lead to a rapid hawkish reversal.
Severe recession and financial stress
Our expectation is that a 2024 recession would be mild, with just two quarters of negative
growth and the unemployment rate peaking around 5.3%. In our view, this is a reasonable
base case given the fundamental strength of household balance sheets and the lack of
overinvestment during the expansion. That said, recent history shows that recessions
often trigger financial stress, leading to a negative feedback loop and a more severe
downturn.
We do not see a clear catalyst for financial stress, but growth downturns can reveal
hidden vulnerabilities or ‘break’ otherwise healthy markets. The past three recessions
have coincided with equity sell-offs of 30% or more, and even past mild recessions
typically lead to some credit stress.
Lingering inflation risks will likely prevent the Fed from cutting rates sharply early in a
recession, but in a severe downturn we would expect the Fed to ease more decisively
than our base case forecast. The FOMC would likely end QT as well, and in this scenario
we see a higher probability that maturing MBS proceeds are reinvested back into the
mortgage market.

Fig. 24: Details of the forecast

% 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24 1Q25 2Q25 3Q25 4Q25 2022 2023 2024 2025
q-o-q
Real GDP (%, a.r.) 2.2 2.1 4.9 0.9 1.3 1.4 -1.1 -1.9 0.4 1.1 2.6 3.4 1.9 2.4 1.2 0.4
(%) 0.6 0.5 1.2 0.2 0.3 0.3 -0.3 -0.5 0.1 0.3 0.6 0.8
Personal consumption (%, a.r.) 3.8 0.8 3.1 1.4 1.5 1.3 -0.4 -1.0 0.7 1.0 1.6 1.8 2.5 2.1 1.2 0.5
Nonresidential fixed invest (%, a.r.) 5.7 7.4 1.5 -1.6 2.7 1.7 -9.5 -9.5 -1.8 2.0 2.8 5.2 5.2 4.1 -0.5 -2.4
Residential fixed invest (%, a.r.) -5.3 -2.2 6.7 -5.8 -12.5 -2.2 -1.0 -1.6 1.5 3.5 4.5 7.2 -9.0 -11.1 -4.3 1.5
Government expenditure (%, a.r.) 4.8 3.3 5.8 3.8 1.7 1.4 1.6 1.4 0.8 0.5 0.5 0.5 -0.9 4.0 2.6 0.9
Exports (%, a.r.) 6.8 -9.3 5.4 1.8 0.5 0.5 0.2 -0.5 0.5 2.5 2.8 3.5 7.0 2.4 0.6 1.1
Imports (%, a.r.) 1.3 -7.6 4.2 -0.3 2.7 1.5 -3.0 -2.4 -2.0 0.3 1.5 3.8 8.6 -1.8 0.4 -0.8
Contributions to GDP:
Final sales (pp., a.r.) 4.5 2.1 3.6 1.4 0.9 1.1 -0.9 -1.5 0.8 1.3 1.8 2.2 1.3 2.8 1.1 0.5
Net trade (pp., a.r.) 0.6 0.0 0.0 0.2 -0.3 -0.1 0.4 0.3 0.3 0.2 0.1 -0.1 -0.5 0.5 0.0 0.2
Inventories (pp., a.r.) -2.2 0.0 1.3 -0.5 0.4 0.3 -0.2 -0.4 -0.4 -0.2 0.8 1.2 0.6 -0.4 0.2 0.0
As noted
Unemployment rate (%) 3.5 3.6 3.7 3.9 4.0 4.1 4.5 4.9 5.2 5.3 5.2 5.0 3.6 3.7 4.4 5.2
Nonfarm payrolls (000s) 312 201 221 180 160 70 -120 -220 50 150 200 250 399 229 -28 162.5
Housing starts (000s, a.r.) 1385 1450 1371 1253 1220 1224 1232 1239 1255 1279 1307 1344 1551 1365 1229 1296
Consumer prices (%, y-o-y) 5.8 4.1 3.6 3.2 2.7 2.4 2.0 1.8 1.9 2.1 2.3 2.4 8.0 4.1 2.2 2.2
Core CPI (%, y-o-y) 5.6 5.2 4.4 3.9 3.3 2.7 2.4 2.1 2.1 2.2 2.4 2.7 6.1 4.8 2.6 2.3
PCE Deflator (%, y-o-y) 5.0 3.9 3.3 2.7 2.1 2.0 1.8 1.9 2.1 2.1 2.2 2.2 6.3 3.7 2.0 2.1
Core PCE (%, y-o-y) 4.8 4.6 3.8 3.2 2.5 2.2 2.2 2.2 2.2 2.2 2.3 2.3 5.0 4.1 2.3 2.3
Federal budget (% GDP) -5.3 -5.8 -6.0 -6.4
Current account balance (% GDP) -3.8 -3.0 -2.6 -2.1
Fed securities portfolio ($trn) 7.82 7.58 7.33 7.10 6.87 6.63 6.39 6.39 6.39 6.39 6.39 6.39 8.04 7.10 6.39 6.39
Fed funds target midpoint (%) 4.875 5.125 5.375 5.375 5.375 5.125 4.875 4.375 3.875 3.375 2.875 2.375 4.375 5.375 4.375 2.375
TSY 2-year note (%) 4.06 4.87 5.03 4.23 4.15 3.85 3.40 3.00 2.70 2.50 2.35 2.25 4.41 4.23 3.00 2.25
TSY 5-year note (%) 3.60 4.13 4.60 3.84 3.85 3.65 3.35 3.05 2.95 2.85 2.85 2.80 3.99 3.84 3.05 2.80
TSY 10-year note (%) 3.48 3.81 4.59 3.88 3.90 3.75 3.55 3.45 3.40 3.35 3.35 3.35 3.88 3.88 3.45 3.35

Note: The unemployment rate is a quarterly average as a percentage of the labor force. Nonfarm payrolls are average monthly changes during the period. Inflation measures and
calendar year GDP are year-over-year percent changes. The Fed securities portfolio is end-of-period. The annual interest rate forecasts are end-of-period. Housing starts are
period averages. Numbers in bold are actual values. Table reflects data available as of 2 January 2024.
Source: BEA, BLS, Census Bureau, FRB, Haver, Nomura

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Nomura | Special Report 2 January 2024

Appendix A-1

Analyst Certification

We, Aichi Amemiya, Jeremy Schwartz and Ruchir Sharma, hereby certify (1) that the views expressed in this Research report
accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2)
no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

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