Many feared that 2023 would be the year of recession. It was a year of remarkable resilience.
The US economy appears to be enjoying the soft landing that many claimed was nearly impossible.
Inflation has cooled dramatically, unemployment remains low and the Federal Reserve could cut interest rates as early as March.
“The big story of 2023 is that we missed the landing,” Justin Wolfers, a professor at the University of Michigan, told CNN.
Wolfers noted that the economy has not only recovered from the fastest recession ever, but has also overcome the war in Ukraine, oil price shocks, political dysfunction and countless other problems.
“It’s the little engine that could,” Wolfers said of the economy. “Considering how bad the tremors were, it could have been much worse.”
The U.S. economy still faces real risks and challenges, from the Israel-Hamas war to the least affordable housing market in a generation. And yet there are tangible reasons to be optimistic about the economy in 2024, forces that are easier to recognize than they were a year ago.
“Remarkable” inflation slowdown
Many on Wall Street and Washington expected inflation to cool after it hit a four-decade high in June 2022.
But few imagined how quickly it would happen. Consumer prices rose 3.1% year-on-year in November, a significant decline from 9.1% in June 2022.
The pace of the slowdown in inflation is “remarkable,” economist Ian Shepherdson wrote in a recent report.
Mark Zandi, chief economist at Moody's Analytics, told CNN he expects inflation to be back near the Federal Reserve's 2 percent target by the end of 2024.
After rising above $5 per gallon in 2022, gas prices fell significantly in 2023. GasBuddy predicts that annual average U.S. gas prices will fall again in 2024, allowing consumers to spend $32 billion less on fuel than in 2023.
Declare victory over inflation
Inflation has cooled so much that the Fed has halted the gigantic interest rate hikes that threatened to derail the economy and unsettle investors.
Fed officials are now even planning rate cuts for 2024, an outcome that would mark victory in the fight against inflation.
Federal Reserve Board Chairman Jerome Powell speaks during a press conference at Federal Reserve headquarters on December 13, 2023 in Washington, DC. – Win McNamee/Getty Images
Zandi said he suspects the Fed will cut interest rates four times in 2024, probably starting in May. Goldman Sachs expects the Fed could begin cutting interest rates in March.
Rate cuts would provide relief on Main Street and reduce the cost of taking out a mortgage, car loan and credit card balance. Mortgage rates have already fallen from nearly 8% in October to 6.6% at the end of the year.
Blockbuster year for stocks
Cooling inflation, fading fears of recession and the threat of interest rate cuts boosted Wall Street.
U.S. stocks ended the year with a bang as the S&P 500 ended the year up for nine weeks, its longest winning streak since 2004. The Nasdaq rose 43%, narrowly missing its best year in two decades.
It's true that the stock market is not the economy. Sometimes what's good for Wall Street isn't good for Main Street and vice versa.
But in this case, the stock market rally largely reflected optimism about the economy, inflation and confidence in a soft landing, which is good news for Wall Street and Main Street.
“Exceptionally low” layoffs
Despite the Fed's interest rate hikes, the unemployment rate is just 3.7%, near its lowest level in half a century.
Initial jobless claims, an indicator of layoffs, remain historically low at just 218,000, a sign that many employers are unwilling to lay off existing workers.
“The standards are extraordinarily low,” said Zandi. “For the alarm bells to ring, the claims would have to be closer to 300,000. We are very, very far away from that.”
If this trend continues, it should support consumer spending – the main driver of the US economy.
“As long as layoffs remain relatively small, the economy should be fine,” Zandi said. “We’re in such a virtuous economic cycle.”
Students attend the Cape Fear Community College Business and IT Career Fair in Castle Hayne, North Carolina. -Allison Joyce/Bloomberg/Getty Images
Paychecks over prizes
During much of the Covid-19 economic recovery, prices have risen faster than paychecks, meaning inflation-adjusted real wages have fallen.
However, the trend has changed recently, and paychecks are getting closer to inflation.
Both Zandi and Wolfers expressed optimism that real wage growth will gain momentum in 2024.
“As time passes here and inflation stays low, incomes will catch up and overtake inflation,” Zandi said. “People will start to feel better.”
“A million things” could go wrong
Of course, the last few years have shown everyone how unexpected developments such as the Covid-19 pandemic or Russia's invasion of Ukraine can shatter even the most optimistic forecasts.
It is possible that further black swan events could occur and darken the economic picture for 2024.
“There are a million things that can go wrong, as we know,” Wolfers said. “Recessions happen.”
Zandi said top on his list of concerns is the risk of further stress in the financial system, such as bank failures in early 2023.
Another worry keeping Zandi awake: the 2024 presidential election.
The race for the White House will certainly be influenced by the economy. (It is the top issue for voters). But the opposite could also be the case.
Zandi predicted a very close contest and warned that a disputed election could spark uncertainty or even social unrest.
“If that's the case, it could be very damaging to the stock market and the overall economy,” he said.
Nevertheless, Wolfers is hoping for a bit of normality after a few wild years for the US economy.
“The secret dream of every economist is that we hope the economy is boring. “I want a 2024 where you never want to call me because most of your viewers have jobs, feel comfortable with their income and nothing bad happened,” he said. “That wasn’t the story because of the pandemic, but it could be the story for next year.”
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