Global economic forces
Tailwinds
- Real income growth supported by disinflation and by elevated wage and job gains
- Added support to consumer-led growth from solid wage and job gains
- Healthy employment growth plus productivity-enhancing investment, including artificial intelligence, supports growth potential
- Still sizeable cash balances among middle- and upper-income groups1
- Release of pent-up services demand still supporting growth directly and through its ripple effect on other parts of the economy
- Overall financial conditions easy except for bank credit standards, which have peaked
- Supportive infrastructure and other investment from fiscal stimulus
- Dollar pullback, price-supportive supply-demand balance underpins commodity producers’ exports and emerging market finances
Headwinds
- Rising debt and increased distressed borrowing, particularly among lower-income households
- Lagged effect of global central banks’ monetary policy tightening and rising real (inflation-adjusted) interest rates
- Historically low housing “affordability” a threat to home sales and construction
- Deflationary threat from weakening money supply, sluggish loan growth
- Global trade and economic growth losing support from China’s struggling economy, recession in Europe
- Threatened U.S. budget restraint, responding to the latest debt downgrade and market pushback against rising Federal interest expenses, slowing state and local spending
Source: Wells Fargo Investment Institute, as of December 31, 2023. Subject to change.
1. Federal Reserve Board, Financial Accounts of the U.S., as of December 7, 2023.
Key Takeaways
- Gathering headwinds are exposing the U.S. economy to the risk of a slowdown into early 2024. Tight and expensive credit in parts of the financial market, labor-market softening, weakness in parts of manufacturing, and a slumping index of leading indicators are all yellow flags in our outlook.
- The most visible risk in our outlook is a sudden reversal of easier financial conditions, leaving leveraged sectors of the global economy and elevated asset values exposed to an abrupt pullback.