Sunwest Bank’s Eric Hovde Sees Economic Headwinds For 2024

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Newport Beach’s own Sunwest Bank held their annual Economic Forum recently at VEA Newport Beach. It’s become a pivotal event for business leaders and is headlined by Eric Hovde who addresses the state of the US economy as well as his prediction for the coming year. The forum, known for its insightful analysis and forecasting, offers a nuanced perspective on the economy’s trajectory, including the employment market, inflation and various asset classes including equities and real estate.

Hovde’s address this year offered a more sober outlook for the economy in 2024, while also acknowledging the relative strength that surprised many economists in 2023. With a presidential election looming, political predictions were also made that may surprise some.

Review of 2023: Resilience Amidst Challenges

The U.S. economy displayed remarkable resilience in 2023, defying some of the more pessimistic predictions from the previous year. Notable highlights included:

  • Federal Reserve’s Actions: Contrary to expectations, the Federal Reserve paused interest rate hikes in the first half of 2023. However, its earlier rate hikes had significant repercussions, contributing to the failure of major banks like Silicon Valley Bank, First Republic Bank, and Signature Bank. These failures had a notable ripple effect on the economy.
  • Commercial Real Estate: In line with predictions, Commercial Real Estate (CRE) property values saw an average decline of 15%, aligning with the forecasted 15-30% drop.
  • Economic Growth: The U.S. economy avoided a recession, contrary to last year’s predictions, growing at an average rate of 3% per quarter.

Hovde attributed this resilience to three main factors:

  • Government Spending: Over $7 trillion in stimulus spending since the pandemic began played a crucial role.
  • Resilient Consumer Spending: Boosted by excess savings and benefits like the student debt pause.
  • Federal Reserve’s Response to Bank Failures: The Fed’s temporary return to quantitative easing and the FDIC’s guarantee on deposits at the failed banks infused $391 billion into the system, buoying the equity market, particularly the “Magnificent 7” (Apple, Microsoft, Google, Amazon, Nvidia, Meta, Tesla), which account for nearly 30% of the S&P 500’s market cap.

Despite these positive signs, challenges persist. Inflation remains stubbornly high, well above the Fed’s 2% target, and corporate profit margins are shrinking. Interest rates have risen rapidly, impacting sectors like housing, which, while supported by low inventory, faces pressure from high rates.

Looking Ahead: Predictions for 2024

As we turn towards 2024, Hovde’s forecast paints a mixed picture:

  • Economic Slowdown: The U.S. is likely to enter a recession, with consumers expected to deplete their savings, leading to only one potentially positive GDP quarter in 2024.
  • Corporate Downsizing and Unemployment: Anticipated downsizing in corporations may push unemployment rates up, though they are expected to remain below 5%.
  • Federal Reserve’s Policy: The Fed might increase interest rates by another 25 basis points but will likely start reducing rates in mid to late 2024, with cuts not exceeding 75 basis points unless a global crisis occurs.
  • Stock Market and Bond Market: The stock market is projected to experience a 15% sell-off within the next six months, followed by a moderate rally when rate cuts begin. The bond market, after three consecutive down years, is expected to see positive growth in 2024.
  • Housing Market: Housing prices might decline by up to 10%, but limited inventory should provide some resilience.
  • Commercial Real Estate: CRE values are expected to continue declining, with multifamily properties potentially underperforming after a decade of strong performance.

Political Predictions

Hovde also ventured into the realm of political forecasting, suggesting significant changes in the U.S. political landscape:

  • Presidential Election: A change in presidency is anticipated, with Joe Biden not expected to retain his position after the next election.
  • Senate: The Republicans are predicted to regain control of the Senate, with potential flips in West Virginia, Montana, and Ohio, leading to a narrow majority.
  • House of Representatives: While both parties might see changes in incumbency, the Republicans are expected to maintain a modest majority.
  • International Tensions: There is over a 50% chance that China might blockade Taiwan, signaling potential geopolitical upheaval.

Sunwest Bank’s Economic Forum provided a comprehensive analysis of the past year and a thoughtful projection for 2024. These insights, crucial for business leaders and policymakers, highlight the complexities of the current economic landscape and the challenges that lie ahead.

Members of the Newport Beach Independent Newspaper (the Indy) were not involved in the creation of this content.

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