Flavor of the Croissants: An Analysis of Why We Still Remain Cautious About the Economic Outlook

Executive summary:

  • The Federal Reserve (the Fed) has made some relatively painless progress thus far in its inflation fight.
  • Some other prominent economists have walked back their forecast for a near-term recession.
  • However, we believe a mild-to-moderate recession in the U.S. and other major developed market economies (e.g., Canada, the U.K., and Europe) is the most likely outcome for 2024.

The bottom line: We think investors should stay cautious and disciplined amid a likely (but not inevitable) recession in the next 12-18 months.


When I was in fifth grade, one of my French teachers held a croissant-selling event. He offered us two types: chocolate-filled croissants and butter-filled croissants. The croissants had markedly different tastes, but they looked quite similar from the outside. Without biting into the croissants, it would have been difficult to discern which was which.

Investors today face a similar challenge. The U.S. Federal Reserve has undertaken aggressive interest rate hikes in a bid to bring inflation back down to its target. Thus far, the progress has been relatively painless. But whether this mission will end in a soft landing or a recession remains an open question.

In late 2022, many forecasters were warning of elevated recession risks in the near-term outlook (approximately 12-18 months ahead). But in the summer of 2023, several prominent economists walked back their recession forecasts. And the market itself seems to be more focused on a higher-for-longer interest rate regime rather than pricing in recession risks.

From our perspective at Russell Investments, we think a recession in 2024 is possible and the most likely outcome.