The Big Idea

A consensus pivot in growth, policy expectations

Stephen Stanley | March 1, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Most economists entered 2023 calling for a spring recession. But in the end, steady and solid growth far outperformed consensus. Similar to a year ago, most economists entered this year anticipating a sharp slowdown in early 2024.  But after mostly robust data in December and January, the consensus has quickly pivoted and substantially upgraded the outlook for this year. Markets, too, have pivoted and now look more tightly aligned with the Fed’s own monetary policy projections.

Final verdict on 2023

The monthly survey of 73 economists conducted by Bloomberg in mid-January 2023 had median estimates for real GDP of 0.0% in the first quarter, -0.6% in the second, -0.3% in the third and +0.6% in the fourth. Expected real GDP over the four quarters consequently came out to a median of -0.2%.  The median odds of recession over the next 12 months, of the 44 economists who responded to the question, was 65%.

In contrast, I began last year looking for a much healthier economy.  The consumer looked likely to remain solid, propelling growth throughout the year.  In that same January 2023 Bloomberg survey, my estimates for quarterly real GDP growth over the course of the year were 2.1% for the first quarter, 2.0% for the second, 1.7% for the third and 1.6% for the fourth for an average of 1.9% over the four quarters.

With the revised release of GDP on February 28—there will be one more monthly revision in March, but the final adjustment to GDP typically involves only minor changes—we can effectively close the book on 2023.  The results were far more impressive than expected.

Real GDP increased at a 2.2% pace in the first quarter, 2.1% in the second, 4.9% in the third and 3.2% in the fourth for an average of 3.1%.  Even relative to my wildly optimistic forecasts entering the year, the actual results outperformed in every single quarter!  The consumer led the way, posting an average gain of 2.7% and reaching at least 3% in three of the four quarters.

It is not uncommon for economists to have big misses on GDP growth for the forthcoming year, but, even in that context, having the median forecast miss by over three percentage points is extraordinary, especially in the absence of an obvious unforeseen shock, such as Covid in 2020, for example.

Repeating the pattern

Despite that experience, economists entered 2024 with a toned-down but still negative outlook.  Keeping in mind that real GDP growth averaged roughly 4% in the second half of last year, the consensus call at the beginning of this year called for a sharp and abrupt slowdown.

The January 2024 Bloomberg survey of 74 economists had a median expectation for real GDP growth of 1.0% in the first quarter, 0.5% in the second, 1.0% in the third and 1.5% in the fourth, for an average gain of 1.0%.  The broad consensus entering the year appeared to be that economic momentum was about to crumble in the face of tight monetary policy.  Then, after narrowly avoiding a recession, the economy would rebound somewhat late in the year, presumably after the Fed began to cut policy rates.

In contrast, my narrative entering the year was that the economic momentum built up in the second half of last year would only gradually dissipate.  My submission to the January Bloomberg survey called for real GDP growth of 2.1% in the first quarter, 1.4% in the second, 0.9% in the third and 1.1% in the fourth for an average for the year of 1.4%.  In broad strokes, the economy would outperform the consensus in the first half of the year but then finally slow to a below-trend pace of growth in the second half of 2024, as the accumulating restraint of monetary policy weighed increasingly heavy on households and businesses.  The policy-induced rebound that the consensus had penciled in for the second half of this year in my view would not come until 2025, since I believe that the FOMC will remain on hold for most of this year.

A quick reversal

Give economists credit for being nimble.  After a string of stronger-than-expected data over the past couple of months, including a big upside surprise on fourth quarter 2023 GDP, a blowout January employment report and a 0.4% advance in the January core CPI, many forecasters pivoted.  The latest monthly Bloomberg survey, conducted about 10 days ago, showed radically different results just one month later.  The new medians for real GDP growth were 1.8% in the first quarter, 1.2% in the second, 1.1% in the third and 1.5% in the fourth for an average of 1.4%.  In fact, the latest consensus is remarkably similar to my forecasts, which have not changed much since January.  For the first time in several years, my GDP projections are not significantly out of consensus.

Mapping the economic outlook to the Fed

The rhetoric of Federal Reserve officials also shifted since the turn of the year.  At the December FOMC press conference, Chair Powell suggested that the committee had actively discussed rate cuts at the meeting, a communications gaffe that led financial market participants to conclude that the Fed would begin moving by early 2024.  Other Fed officials pushed back somewhat against that impression subsequently, but the real tone change came at the January 31 FOMC press conference, when Powell noted that, despite a string of positive inflation readings, the Fed needed to see more to gain sufficient confidence that price hikes were on a sustainable path to the Fed’s 2% target.  A series of subsequent speeches by various Fed policymakers painted a consistent picture that the FOMC was not as close to making a move as had been previously assumed.  In the wake of the torrid economic data for January, Fed officials have begun to increasingly discuss being “patient” before declaring victory on inflation.  Further, solid economic activity gives the FOMC the luxury of waiting, as it limits the downside risk—namely, sparking a recession—from leaving rates too high for too long.

While economists’ expectations for real GDP growth have shifted dramatically over the past month or so, the median projections of economists for Fed policy have not changed as much.  In both the January and February Bloomberg surveys, the median timeframe for the first Fed rate cut was June.  Nonetheless, there was a significant minority of economists who, in January, were calling for the Fed to begin cutting rates as soon as March or May.  Those calls have been scaled back in recent days, and there appears to be a broad consensus at the moment supporting the initial rate move coming in June.  As I have laid out in detail elsewhere, my own view has been and remains that the FOMC will be on hold until November.

In contrast to economists’ views, financial market pricing of the Fed policy outlook has seen a drastic shift in recent months.  In early January, the January 2025 fed funds futures contract priced in 170 bp of easing for this year, with the first move fully priced for March.  In the wake of the string of robust economic data releases over the past six weeks, fed funds futures have moved sharply.  As of this writing, a first quarter-point cut is not full priced until July, and only 80 bp to 85 bp of cuts are priced in for the year, just a few basis points more than the December median FOMC “dot” projection.

In short, just two months into the new year, economists have extensively reworked their economic outlooks for 2024, while financial market participants have made a drastic shift to their expectations for Fed policy.