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Resilient Consumer Guides U.S. Soft Landing 

January 23, 2024


U.S. consumers continued to spend in December, with retail sales up 5.6% from a year ago. Strong consumer balance sheets, a tight labor market and higher wages have helped consumer spending improve since bottoming in mid-2023. With inflation moderating, even real retail sales, which are adjusted for inflation, are up 2.2% year over year, their highest pace since the first half of 2022.


It was not surprising that the strong retail sales report reset market expectations for when and by how much the Federal Reserve (the Fed) will cut rates in 2024. The federal funds futures market now expects less than a 50% probability of a rate cut at the Federal Reserve’s March meeting, and a total of five and a half cuts in 2024. This compares to our forecast of a total of four cuts.


With the economy in good shape and inflation cooling, we continue to believe that the Fed can bring inflation down toward its 2% target without a sharp rise in unemployment. But for a soft landing to be possible, the U.S. consumer, which accounts for about two-thirds of the economy, will need to remain resilient. While strong consumer spending has supported the economy over the past year, we expect some softening to emerge as wage growth slows and excess savings continue to decline. That said, we do not expect spending to collapse, which should keep growth chugging along, although at a more modest pace. 




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