United States Economic Forecast

The Q4 2023 forecast explores how the US economy managed to continue to grow amid challenges, including a runup in interest rates to fight inflation, federal budget policy volatility, and growing geopolitical tensions.

Daniel Bachman

United States

“Out of this nettle, danger, we pluck this flower, safety.”

—Henry Hotspur in William Shakespeare’s Henry IV (Part 1, Act 2, Scene 3)

Fed officials might well be feeling like they have managed to follow Hotspur’s advice. The US economy seems to have avoided the pain of a recession while enjoying a pretty significant fall in inflation.1 That’s a good outcome under any circumstances, but it looks even better in light of everything that’s been going on over the past couple of years. The labor market has remained tight, but there is little sign of a wage-price spiral getting out of control. Geopolitical tensions are rising, with US allies fighting in two wars. Growth in key US economic partners is slowing, and Congress has added budget funding volatility into the mix. But somehow, none of these have so far drawn enough blood to prevent yet more job growth in the United States, a rise in real wages, and a growing economy.

The current state of the economy has created questions about some of the standard paradigms economists use to explain inflation and labor markets.2 But the final scene of this play is still to come, and the immediate risks to the economy remain relatively high.

Deloitte’s baseline forecast continues to be optimistic. Data in October and November supports this view. But several factors could derail US economic growth in the next year:

  1. Inflation is falling, but it’s not completely back to the target level. Fed officials have stated that they might tighten monetary policy further to get inflation all the way back to target.3
  2. Long-term interest rates have only recently risen above their pre-COVID-19 levels. That delayed reaction means that part of the impact of previous Fed tightening remains to be seen.
  3. The US budget process still poses some risk to economic growth. The differing objectives and lack of will to negotiate these differences among the key members of Congress suggests that a partial or even full government shutdown remains a possibility.
  4. Geopolitics continue to create new challenges for US policymakers. US allies are asking the country to provide weapons, ammunition, and financing, which will challenge the budget process. Supply shocks—particularly oil price shocks—might also derail the US economy.

Even if the US economy continues to shrug off these risks, there are other longer-term challenges:

  1. Climate change poses a large challenge for the US economy, both because immediate costs are growing and because of the need to invest to prevent even worse problems.4
  2. US population growth is slowing. While US demographics are better than that of many other developed countries, we will need to continue to adjust to slow labor force growth,5 tighter labor markets, and the need to pay for care of an aging population.
  3. The current US budget trajectory is unsustainable (which is, of course, related to the need to pay for the health care of an aging population).6
  4. The most important question for the future of the US economy is whether trend productivity growth can grow fast enough to improve the standard of living. Prior to the pandemic, productivity growth was disappointing. If productivity growth picks up, many of the country’s other problems will become easier to solve.

The Deloitte forecast is optimistic that the US economy can overcome these challenges. Our baseline shows inflation falling, unemployment staying low, and productivity growth picking up. But the truth is that, like Shakespeare’s Hotspur, we haven’t actually picked the flower. In the play, Hotspur’s speech doesn’t reflect what will happen to him; he meets a bloody end at the hands of the future King Henry V. US policymakers are justly concerned that what looks like success could turn into failure. With so many potential challenges, nobody should take US economic growth for granted.


  • Baseline (60%): Economic growth slows to the potential rate of around 1.5% to 1.6%, while inflation moderates to below 3% by 2025. This long-desired “soft landing” is accompanied by a stable labor market, despite slowing job growth. Slow growth in Europe and China, higher energy prices, and an expensive dollar have not proven to be strong enough headwinds to push the US economy into recession, or even to slow it below potential. Some sectors, however, do experience weakness. High interest rates and market saturation reduce demand for consumer durables and housing. Investment in nonresidential structures remains weak, as the oversupply of office buildings and retail space weighs on the market. Construction of manufacturing structures—encouraged by efforts to build chip plants in the United States as well as alternative energy production—offsets this weakness.
  • Inflation comes back (20%): The decline in inflation due to decreasing supply chain pressures proves to be temporary. Geopolitical uncertainty leads to rising commodity prices, leading inflation expectations to become unanchored. The Fed, having attempted to slow inflation through rapidly raising interest rates in 2022 and 2023, raises rates a bit more, slowing economic growth but not creating a recession. Inflation settles in at about 4.5%, and unemployment gradually rises over the next five years.
  • The next recession (20%): A long shutdown in early 2024, combined with a financial crisis, plunges the US economy into a significant downturn in the first quarter of 2024. Although federal spending bounces back in the second quarter, the damage to expectations is large enough to shrink the economy for most of 2024. The Fed responds by lowering interest rates and the economy starts to recovery in late 2024. The unemployment rate hits 5% before the labor market starts to recover. 


Consumer spending

The near-term outlook for consumer spending turns on two big questions:

1. What will happen when consumers finish running down their pandemic savings?

In 2020, during the height of the pandemic, US households increased their savings—households that remained working had little to spend money on. Estimates of the total amount of such excess savings range widely, and so do estimates of how much of those savings remain to be spent.7 One possibility is that consumers have spent that money or may become more cautious in the future. Another possibility is that consumers will continue to spend, perhaps even beyond their incomes. Past borrowing creates some headwinds for consumer spending, however. For one, there is the higher cost of paying for past spending—rates charged on credit card balances are at very high levels. An additional headwind to spending is the fact that households with student loan debt will need to divert funds to serve that debt—money that now will not be supporting additional consumption. And yet another headwind is caused by high rents and rising house prices.

The baseline Deloitte forecast assumes that consumer spending will continue to grow, but at a rate slightly below overall GDP growth.

2. As consumer services recover, what happens to durable goods?

The pandemic sparked a remarkable change in consumer spending patterns. Dollar spending on durable consumer goods is now up 43% over the last quarter of 2019 (compared to just 24% over the same period for services). Households substituted bicycles, gym equipment, and electronics for restaurants, entertainment, and travel during the pandemic. Although we saw some reversal of this trend in 2022, durables spending remains remarkably high relative to total consumer spending. This trend seems unlikely to continue. The forecast has durable consumer spending growing more slowly than consumption and income through the five-year horizon.

There is a silver lining for some households in the tight labor market/high inflation environment of the past couple of years. Low-wage workers have seen real wages go up, while high-income workers have experienced the greatest erosion in the value of their pay.8 It remains to be seen whether this reduction in inequality will continue, but it’s certainly welcome news to lower-wage workers.

Retirement remains a significant concern for many workers: Only 31% of nonretired adults described their retirement as on track, with a quarter of nonretired adults saying they had no retirement savings.9 As the population ages, many people are likely to find it difficult to afford the retirement they expect or hoped for when they were younger.


The housing sector outperformed the broader economy in the wake of the pandemic, as buyers and sellers found ways to navigate the pandemic’s restrictions.10 Then the tables turned. As the Fed raised interest rates and inflation appeared, long-term interest rates moved up dramatically. The result was a decline in housing starts from 1.7 million (at an annual rate) in the first quarter of 2022 to less than 1.4 million in the first quarter of 2023. And house prices, which rose sharply starting in the middle of 2021, stabilized in early 2023—although they are starting to rise again.

The run-up in house prices created a huge housing affordability problem. On top of that, mortgage rates have moved up substantially. That not only makes the monthly payments more expensive, but also incentivizes current homeowners to avoid moving and selling their homes, which would mean losing their low-interest rate mortgages. Don’t be too worried, however; some research suggests that homeownership patterns for younger families aren’t that different from those of previous generations.11

Our forecast shows the fall in residential construction continuing through the end of this year. Housing construction is then forecast to bounce back, but only modestly; by 2025, housing starts reach our estimated equilibrium of about 1.5 million units per year.

Demographics suggest that housing is not likely to become a key driver of economic growth in the foreseeable future. Population growth has slowed to less than 0.5% per year (compared to over 1% during the housing boom in the 2000s). The baseline forecast assumes that, after the recovery from the current housing downturn, housing starts will start to rise slowly. Over the five-year forecast horizon, however, housing starts never reach 1.5 million per year.

Business investment

Businesses have ramped up investment since the initial impact of the pandemic, but they have been selective about what they are investing in.

Investment in nonresidental structures didn’t recover to the prepandemic level until the third quarter of 2022. However, structures investment picked up in late 2021, and has been growing quite quickly since then (although the third quarter showed little growth).

Mining structures investment has picked up in response to higher oil prices. The surprise here is that mining didn’t grow earlier and faster. But the more surprising contributor to growth is manufacturing structures. Recent legislation—the CHIPS and Science Act and the Inflation Reduction Act—provide significant incentives for increasing manufacturing capacity in the United States. And those incentives do seem to be creating demand for investment in manufacturing. It’s probably no surprise that the pickup in structures investment occurred after these bills became law.

Prospects in many other nonresidential building sectors remain grim. The business case for office buildings and retail space has diminished, with online shopping and the shift toward working from home. Current talk of converting office buildings to residential spaces suggests that real estate experts don’t see a lot of room for growth in office demand.

Investment in equipment has been slowing. After rising over 10% in 2021 and 4.3% in 2022, equipment investment has been slowing and, in fact, declined in three of the last four quarters (to the third quarter of 2023). Since the pandemic, equipment investment has been dominated by transportation equipment and information technology (IT) equipment. Remote work makes IT equipment (and software) a substitute for buildings, and so the counterpart to weak investment in commercial structures is a lot of investment in IT. That need was particularly strong as companies moved to more virtual work over the past few years. But now that the initial investments have been made, we are seeing a slowdown in investment in information processing equipment. Some of this weakness has been offset by continued fast growth in investment in transportation equipment.

Investment in intellectual property (which consists primarily of software and R&D) remained strong during and after the pandemic. That’s mostly because of investment in software, and it likely reflects in the investments needed for teleworking. It has slowed in recent quarters, but we expect this category to remain strong over the next few years as businesses continue to require software to accompany their investments in information processing equipment.

Future investment is likely to gradually switch back to structures in response to incentives to invest in climate change remediation. Such investment may not appear as profitable as past investment. Current methods of measuring the economy, and corporate profits, don’t correctly measure the cost of climate change, or the benefits of reducing greenhouse gas emissions.12 US government policy is now pointing companies toward more investment in climate remediation, and an increasing share of business investment spending is likely to be dedicated to this goal.

Financing investment is becoming a bit pricier as long-term interest rates rise. However, many nonfinancial businesses are sitting on a pile of cash. In our baseline forecast, the AAA corporate bond rate rises to just under 6% and stays there through the end of the forecast horizon. Although that may appear high, historically it is not that high. And continuing innovation in areas like artificial intelligence will help to raise the demand for capital. On top of that, the need for investments in climate remediation may be quite costly. The International Monetary Fund estimates US$3 trillion to US$6 trillion of spending per year required through 2050.13

Between the need to refit for climate change remediation, the introduction of new technology, and investment in more robust supply chains, US businesses are likely to find plenty of uses for capital, even at interest rates that remain above the prepandemic level. Our forecast has a short-term decline in nonresidential investment spending, but after 2024, investment grows faster than GDP through the forecast horizon.

Foreign trade

Recent US trade data has been surprisingly strong considering that both China and Europe—two major drivers of the global economy—are experiencing slower than expected growth. After contributing to growth for the last five quarters, net exports were slightly negative in the third quarter of 2023. And that’s despite a relatively strong dollar coupled with high inflation. Petroleum products are part of the story. But exports of automobiles and related products, consumer goods, and capital goods have all grown surprisingly fast over the past year.

Our forecast shows US exports growing at a good pace over the five-year horizon as the dollar falls (due to a reduction in global risk) and growth picks up abroad. Imports, however, will be restrained by the fall in demand for consumer durables.

There is a lot of talk about “deglobalization,” meaning a reversal of the dramatic increase in international trade that occurred in the past few decades. Global exports grew from 13% of global GDP in 1970 to 34% in 2012 and have stabilized at that level. More recently, the pattern of trade has changed. US imports from China have fallen, and US imports from other Asian countries are growing. This suggests that while trade patterns may be changing, the United States remains as fully connected to the rest of the world as it has been in the past.14 In 2022, exports accounted for 11% of GDP, just slightly less than the 12% average in the five years before the pandemic.

Government policy

Funding the federal government remains a source of risk for the economy, although by December there were more signs that a deal—or at least a continuing resolution funding the government at current levels for the rest of the year—was possible. We’ve accounted for the risk in our recession scenario. To have a significant economic impact, the shutdown would have to last for longer than any past shutdown. Our recession scenario assumes that about half of federal workers are furloughed for about half the quarter. That has a significant impact on the economy. But, just as important, it would have an impact on confidence, business investment, and consumer spending.

Looking beyond the immediate problems of finance, the earlier Infrastructure Investment and Jobs Act and Inflation Reduction Act will boost government spending over the next 10 years. This spending will increase the capacity of the economy, although it might not show up as faster productivity growth.15 However, much of this additional spending comes toward the end of our forecast horizon, and consequently, the short-term impact on the forecast is minor. Also, the amount of spending is relatively modest compared to the economy as a whole. According to the Congressional Budget Office’s estimates, in 2026, the peak year of spending, the Infrastructure Investment and Jobs Act will add about US$61 billion to the federal deficit.16 That amounts to about 0.2% of the projected GDP. These initiatives are likely to have a positive and significant impact on public capital in the United States, but they are not a large fiscal stimulus by any means.

Our baseline forecast assumes the federal deficit will rise to over US$1.7 trillion by FY28. That’s a hefty amount, one that inevitably raises the question of whether the US government can continue to borrow at such a pace. The answer is that it can—at least until investors lose confidence. At this point, most investors show no sign of concern about the ability of the United States Treasury to repay US debt.17

Eventually, however, the US government could face a crisis if it does not eventually find ways to reduce the deficit and consequent borrowing. The crisis may be many years away, and current conditions may argue for waiting. It would, however, be a bad idea to wait too long once those conditions lift.

Labor markets

The labor market is slowing, but is still hot. The unemployment rate remains low, and the three-month average rate of job growth was 204,000 in October, substantially above the 20,000 or so jobs that we estimate would meet the long-run growth of the labor force. The slowing is likely to continue. The baseline scenario assumes the unemployment rate rises above 4.0% in 2024. Even so, labor markets would remain tighter than employers have typically experienced in the prepandemic period.

While employment has fully recovered from the pandemic, total labor force participation has not. However, the labor force participation rate for people under the age of 65 hit the prepandemic level in April. Most of the workers who left the labor force are older Americans. Many of these people have probably retired, in the sense of expecting to remain permanently out of the labor force, but some can likely be enticed back with the right compensation packages and flexible working hours and conditions.

As is the case in many areas, the pandemic accelerated trends that were evident even before it started. Slow labor force growth and continued high demand had already created conditions that required companies to offer higher wages to lower-skilled workers and to be more imaginative about hiring. In the post-COVID-19 pandemic world, companies that make extra effort to find the workers they need and provide conditions to attract those workers will have an important competitive advantage.

Deloitte’s baseline forecast assumes that job growth slows to sustainable levels in the next few years. It’s important to remember that job growth is likely to slow simply because there aren’t enough workers. That means slowing employment growth—if the unemployment rate remains low—is not necessarily a signal of an economic downturn. Over the longer horizon, labor force growth slows to just 0.2% per year, presenting continuing challenges for employers. It’s a demographic fact that employers will have to learn to live with.

Financial markets

The key question for financial markets over the next few years is whether long-term interest rates will once again settle in at a relatively low level, or whether they will return to levels consistent with the experience before the global financial crisis. Those arguing that interest rates will return to low levels point to fundamentals such as demographics (the aging global population) and slowing innovation growth.18 Those arguing that interest rates will return to previous behavior point to the slowing of savings growth from China and the need for large investments (whether public or private) to reduce the impact of climate change.19 The Deloitte forecast assumes that long-term interest rates remain relatively high as demand for capital remains strong, while global savings grow more slowly over the coming years.

Short-term rates play a smaller role in the long-term outlook, but a larger role in the minds of people following financial markets. Our baseline forecast assumes that the Fed will not want to tighten further, as inflation continues to step down. Given our relatively optimistic forecast for GDP and employment in the baseline, the Fed does not see the need to start lowering the funds rate until late 2025, and then gradually eases until it reaches 3.375%, which is our estimate of the long-term neutral rate. Demand for capital for investment (including significant government and private outlays on climate change) keeps the 10-year rate from falling, and it reaches its long-run value of around 5.5% by 2025. This outcome is consistent with the historical relationship of these rates under moderate inflation: Should inflation continue to be high, the spread between the 10-year note and the Fed funds rate could continue to rise (as investors account for expected inflation in the later years of the note’s period). Investors should watch out for the possibility of higher interest rates—although by the standards of the 1970s and 1980s, these rates are still quite low.


Although Fed speakers continue to emphasize their hawkish side,20 inflation appears to be falling, and economic activity is slowing. That’s a recipe for not changing policy—especially since the Fed continues to reverse quantitative easing by about US$95 billion per month.21 The recent hike in long-term rates suggests that there will be additional impacts from the previous Fed tightening.

The low inflation reported in June and July reflects a decline in the underlying trend, with some estimates of trend inflation now below 3%.22 The year-over-year inflation rates often cited in the press are higher, but the period they cover includes a lot of “old news.” It’s certainly too early to completely declare victory. But, absent another shock like the Russia-Ukraine conflict or an expansion of the conflict in Gaza, inflation appears to be at manageable levels.

The Deloitte forecast continues to assume that the current inflation is “transitory” in the sense that it will dissipate over time. Our baseline forecast shows CPI inflation falling below 3% in 2024. We remain optimistic that today’s households and businesses will likely avoid the unpleasant experiences of long inflation and painful disinflation that their predecessors experienced from 1970 to 1985.



Daniel Bachman

United States


  1. Unless otherwise noted, all data cited in this article are taken from Haver Analytics’ reporting of US Government data.

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  2. Daniel Bachman, Is it time to rethink inflation?, Deloitte Global Economics Research Center, Deloitte Insights, July 2023.

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  3. See, for example, Jerome H. Powell, “Opening remarks at the International Monetary Fund’s panel Monetary Policy Challenges in a Global Economy,” Board of Governors of the Federal Reserve System, November 9, 2023.

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  4. See Deloitte’s research on the costs and benefits of climate change remediation for the United States here: Deloitte, “The United States’ turning point on climate change,” accessed December 7, 2023.

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  5. Daniel Bachman, The aging of the US labor force, Deloitte Global Economics Research Center, Deloitte Insights, November 2023.

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  6. For a detailed discussion of the US budget problems, please see Daniel Bachman, US government debt: A US$33 trillion problem?, Deloitte Global Economics Research Center, Deloitte Insights, October 2023.

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  7. Omar Barbiero and Dhiren Patki, “Have US households depleted all the excess savings they accumulated during the pandemic?,” Federal Reserve Bank of Boston, November 7, 2023; Hamza Abdelrahman and Luiz E. Oliveira, “Excess no more? Dwindling pandemic savings,” Federal Reserve Bank of San Francisco SF Fed Blog, August 16, 2023. 

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  8. David Autor, Arindrajit Dube, and Annie McGrew, The unexpected compression: Competition at work in the low wage labor market, National Bureau of Economic Research, November 2023.

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  9. Board of Governors of the Federal Reserve System, Economic well-being of US households in 2022, May 2023.

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  10. Lester Gunnion, Why is the housing sector booming during COVID-19?, Deloitte Insights, November 20, 2020.

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  11.  Dana Anderson and Sheharyar Bokhari, “The race to homeownership: Gen Z tracking ahead of their parents’ generation, millennials tracking behind,” Redfin, April 21, 2023.

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  12. Pradeep Philip, Claire Ibrahim, and Cedric Hodges, The turning point: A new economic climate in the United States, Deloitte, January 2022; Daniel Bachman, The (true) cost of a low carbon future, Deloitte Insights, March 30, 2023.

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  13. Kristalina Georgieva and Tobias Adrian, “Public sector must play major role in catalyzing private climate finance,” International Monetary Fund Blog, August 18, 2022.

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  14. Ira Kalish and Michael Wolf, Globalization is here to stay, Deloitte Insights, December 14, 2022.

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  15. Bachman, The (true) cost of a low-carbon future.

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  16. US Congressional Budget Office, “Senate Amendment 2137 to H.R. 3864, the Infrastructure Investment and Jobs Act, as proposed on August 1, 2021,” August 9, 2021.

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  17. Bachman, US government debt.

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  18. Olivier Blanchard, “Secular stagnation is not over,” Peterson Institute for International Economics, January 24, 2023.

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  19. Kristin Forbes, Robert F. Owen, Kenneth Rogoff, Stephane Schmitt Grohe, and Lawrence Summers, “Economic shocks, crises, and their consequences,” Allied Social Science Associations 2023 Annual Meeting, New Orleans, Louisiana, January 7, 2023.

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  20. Powell, “Opening remarks.”

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  21. Board of Governors of the Federal Reserve System, “Plans for reducing the size of the Federal Reserve’s balance sheet,” press release, May 4, 2022.

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  22. Federal Reserve Bank of New York, “Multivariate Core Trend inflation,” October 2023.

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Cover image by: Sofia Sergi