As economic forecasters recast their 2024 forecasts in response to recent moves by the Federal Reserve, The Conversation turned to two financial economists to share their thoughts on the year ahead.
D. Brian Blank and Brandy Hadley are professors who study finance, business financial decisions, and economics. They explain what they see in 2024.
1. This time last year many experts saw a downturn on the horizon. Will the long-predicted recession finally happen in 2024?
The good news is: probably not.
The US economy is not in recession and will likely continue to grow. Last year, gross domestic product exceeded expectations, inflation is trending downward and employment remains robust. Real wages have risen, as has consumer spending. Additionally, demand for housing is strong and financial markets are at an all-time high. While no one should argue that a recession will never happen again, 2024 seems unlikely to happen – unless there is an unexpected trigger such as a new global pandemic.
To be fair, optimism leads to risk-taking, which can always contribute to the next downturn. And the U.S. economy faces numerous challenges, including already elevated debt costs, a possible government shutdown, rising consumer debt and ongoing commercial real estate issues that could lead to prolonged downturns in the industry. Other headwinds include national debt, weaker economies of other countries, and ongoing global conflicts and trade tensions.
While 2023 seemed to many people like a “soft landing” – the elusive achievement in which policymakers reduce inflation without triggering a downturn – previous recessions followed periods in which people thought they had been avoided. That may be why bankers, financial managers and economists are still paying attention to the risks of persistently high interest rates.
Still, the fundamentals are strong and could rise if CFOs are to be believed. Additionally, despite the dysfunction in Washington, recent legislation and policies such as the CHIPS and Science Act, the Bipartisan Infrastructure Agreement, the AI Bill of Rights, and the Executive Order on Safe, Secure, and Trustworthy Use of Artificial Intelligence could further spur economic growth through stimulus creation of jobs and increasing competitiveness. In particular, public and private investment in manufacturing and industry is at unprecedented levels and technology is advancing rapidly, further contributing to the positive economic outlook, not to mention strong consumer balance sheets.
2. How about a “vibecession” then? Is this a situation we are in now and why is it important for 2024?
When you look at the economic pessimism evident in polls and on social media, a fascinating paradox emerges: Despite the collective bad mood, the majority of Americans say their personal economic situation is fundamentally fine.
Author Kyla Scanlon has called this condition “vibecession”: While the economy continues to grow, the mood is bad. The fact that consumer spending continues to post sustained growth despite the bleak economic outlook highlights a strange disconnect between sentiment and economic activity.
3. What happens if individual incomes and expenses continue to rise? Wouldn't that be enough to end the Vibecession?
In short: not necessarily.
While inflation has been high in recent years, peaking at 9.1% in June 2022 before recently falling to 3.1%, most Americans have not seen their income rise as quickly as that since 2021 Inflation. Therefore, many are frustrated that they cannot afford what they could in 2020. Does it kill the mood to remember, as previous generations did, that Coca-Cola used to cost a nickel? If inflation rises faster than wages in 2024, sentiment could suffer.
Furthermore, other positive economic developments appear to have little impact on sentiment. Almost everyone who wants a job has one, which is a crucial factor in maintaining consumer confidence and purchasing habits.
“While no one should argue that there will never be another recession, 2024 seems an unlikely time for one to occur—unless there is an unexpected spark, such as a new global pandemic,” write D. Brian Blank and Brandy Hadley . Photo from Depositphotos.com
Gas prices certainly play an outsized role in shaping sentiment, and when they fell unexpectedly in December, sentiment improved. This highlights the influence of energy costs on public sentiment and suggests that fluctuations in gas prices can quickly influence overall economic sentiment.
However, we expect consumers will continue to do business as usual – spending money and feeling bad about the economy – until a shock forces them to exit. This strange contradiction between perceived gloom and personal financial well-being highlights the complex interplay of psychological factors and material realities that shapes the entire economic narrative.
4. Could vibecession become a self-fulfilling prophecy?
While consumers are doing poorly, they continue to spend more than expected and have done so for more than a year. These facts seem to contradict each other, and some experts worry that the pessimism itself could be damaging to the economy. That's because people spend less when they're worried about the future.
However, this has been the case for months – so it's unclear why this should change now.
While we understand that consumer sentiment is complex, we still think it makes more sense to focus on what people do rather than what they say. And people are behaving in ways consistent with a strong economy due to rising real incomes, not to mention a robust labor market.
And overall, when you tell people for almost two years that a recession is imminent, you shouldn't be shocked that they're gloomy. If the consensus is wrong, it shouldn't surprise anyone if sentiment diverges from economic data – especially if politicians blame each other for a weaker economy.
5. What else are you paying attention to in 2024?
After the Federal Reserve meeting in December, many forecasters have changed their 2024 forecasts and expect the Fed to cut interest rates more than they had expected before Chairman Jerome Powell's upbeat press conference. Although many expected Powell to keep discussion of rate cuts to a minimum, the reaction at the meeting was strong: inflation was seen as defeated and consensus expectations were for an overnight interest rate below 4% by year's end to keep financial conditions to relax.
While investors appear to have overreacted – once again – a further slowdown in inflation and economic growth is likely as the economy continues to normalize post-pandemic. The most likely outcome for 2024 is that the Federal Open Market Committee will cut interest rates, following another downward revision of inflation data back in March, until year-end rates are just below the Fed's federal funds rate forecast of 4.5% . However, the Fed is not waiting for inflation to reach its 2% target before cutting interest rates, meaning that rapidly falling inflation could allow further rate cuts.
Economic growth is expected to remain strong in 2024 and inflation is likely to slow, albeit at a more subdued pace. And with mortgage rates now falling below 7%, housing starts and mortgage originations are increasing. Now housing affordability could improve in the coming year, albeit from its lowest level in decades.
While 2024 will likely bring debates in other areas, hopefully these economic conversations will occur less in 2024 than in 2023. And if we're lucky, markets will rise at least as quickly, although we should remember that last Almost everyone was wrong this year – and if there's one prediction we can make with confidence, it's that at least some of today's predictions will look pretty silly in retrospect.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
This MFP Voices essay does not necessarily reflect the views of the Mississippi Free Press, its staff or board members. To submit an opinion for the MFP Voices section, submit up to 1,200 words and sources and fact-check the information included to [email protected]. We welcome a variety of different viewpoints.
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