U.S. Economic Growth Will Be Sluggish: Wells Fargo

The U.S. will likely experience slowing growth in 2024 as the effects of monetary policy continue to filter through the economy, cool down the labor market and decelerate consumer spending, according to a Wells Fargo analysis.

Consumers kept the economy growing at a better-than-forecast pace in 2023, despite interest rates rising to two-decade highs. The Federal Reserve hiked rates at a breakneck pace not seen since the 1980s, beginning in March 2022. Rates have since settled to the current 5.25 to 5.5 percent. The elevated rates pushed up borrowing costs for mortgage rates, auto loans and business investments.

Last year, consumers bulldozed their way past the high rates and elevated inflation—the reason the Fed hiked rates in the first place—and spent billions of dollars fueling economic growth that in the fourth quarter of 2023 expanded by a robust 3.3 percent.

But the effects of tight monetary policy are likely to start biting through the year and could lead to a slowing down of the economy in 2024, said Wells Fargo's chief economist, Jay Bryson.

Real consumer spending, which measures spending adjusted for inflation, grew by 2.8 percent in the fourth quarter and 3.1 percent the previous quarter, according to Wells Fargo, but is likely to decline in the months ahead.

Bryson forecast consumer spending—the bedrock of the U.S. economy—to continue to grow but possibly at about one to one and a half percent in the first quarter of 2024, and by the middle of the year could slow to about a half to one percent.

Last year, the economy grew roughly 2.7 percent in the fourth quarter compared to the same time the year before, Bryson said.

"We're looking at roughly half the growth rate in 2024 that we had in 2023. So positive, right, but it's a slower growth rate," Bryson told Newsweek.

To put into context, in the decade before the pandemic, the U.S. economy grew on average by 2.4 percent and last year saw growth above the expansion seen during that period. This year is likely to witness below-average economic expansion, on the back of the most aggressive hiking cycle in decades.

"I think, at the end of the day, most businesses will characterize this year as OK, not a blockbuster, but OK," Bryson said.

Part of that will be because of a slowdown in hiring compared to a year ago. Recent data suggests some softening of the labor market. As of January 20, jobless claims rose by 25,000 to 214,000, according to the Labor Department, while continued claims, an indicator of how long people are taking to find jobs, also ticked up.

Wells Fargo economists expect the labor market to slow in 2024 to about 62,000 new jobs created a month compared to last year's average of 225,000 with the unemployment rate forecast to rise to 4.2 percent. In 2023, the unemployment rate dipped under 4 percent for the year, they said.

Bryson said businesses are still retaining workers and are reluctant to shed jobs after learning how challenging it was to recruit talented employees coming out of the COVID-19 pandemic.

"As long as businesses just don't start making big, drastic cuts to their payrolls, then I think that's a reason to expect consumer spending to continue to grow and for the economy in general to continue to grow," he said.