(CNN) — Many feared that 2023 would be the year of the recession. It proved to be a year of remarkable resilience.
The American economy appears to be enjoying a soft landing that many considered nearly impossible.
Inflation has cooled dramatically, unemployment remains low and the Federal Reserve could cut rates as early as March.
“The big story of 2023 is that we blocked the landing,” Justin Wolfers, a professor at the University of Michigan, told CNN.
Wolfers noted that the economy not only recovered from the fastest recession in history, but also overcame the war in Ukraine, the oil price shock, political dysfunction and many other problems.
“It’s the little engine that could do it,” Wolfers said of the economy. “Considering the severity of the concussions, it could have been a lot worse.”
The American economy still faces real risks and challenges, from the war between Israel and Hamas to the least affordable housing market in a generation. Yet, there are tangible reasons to be optimistic about the economy in 2024, forces that are easier to spot than they were a year ago.
“Noticeable” cooling of inflation
Many on Wall Street and Washington had expected inflation to slow after hitting four-decade highs in June 2022.
But few predicted how quickly it would happen. Consumer prices rose 3.1% year-on-year in November, well below June 2022’s 9.1%.
The speed of inflation’s cooling is “remarkable,” economist Ian Shepherdson wrote in a recent report.
Mark Zandi, chief economist at Moody’s Analytics, told CNN he expects inflation to return near the Federal Reserve’s 2% target by the end of 2024.
After topping $5 a gallon in 2022, gasoline prices fell significantly in 2023. GasBuddy predicts that annual average U.S. gasoline prices will fall again in 2024, allowing consumers to spend $32 billion less on fuel compared to 2023.
A victory over inflation
Inflation has cooled so much that the Federal Reserve has halted rate hikes that threatened to derail the economy and spook investors.
Federal Reserve officials are now even planning rate cuts through 2024, an outcome that would mean declaring victory in the war on inflation.
U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference at Federal Reserve Headquarters December 13, 2023 in Washington. (Vincere McNamee/Getty Images)
Zandi said he suspects the Federal Reserve will cut rates four times in 2024, likely starting in May. Goldman Sachs is betting that the Federal Reserve could start cutting rates in March.
The rate cuts would bring relief to Main Street, reducing the costs of getting a mortgage, getting a car loan and maintaining a credit card balance. Mortgage rates have already fallen from nearly 8% in October to 6.6% at the end of the year.
A very positive year for stocks
Cooling inflation, easing recession fears and looming rate cuts have boosted Wall Street.
US stocks ended the year with a bang, with the S&P 500 rising for nine weeks at the end of the year – 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 reflects optimism about the economy, inflation and confidence in a soft landing, which is good news for Wall Street and Main Street.
“Extraordinarily low” layoffs.
Despite rate hikes by the Federal Reserve, the unemployment rate stands at just 3.7%, near its lowest level in half a century.
Initial jobless claims, a proxy for layoffs, remain historically low at just 218,000, a sign that many employers are reluctant to lay off the employees they have.
“Applications are extraordinarily low,” Zandi said. “For the alarm to sound, claims would have to approach 300,000. “We are very, very far from that.”
If this trend lasts, it should support consumer spending, the main driver of the US economy.
“As long as layoffs remain relatively low, the economy should do well,” Zandi said. “We’re in this kind of virtuous economic cycle.”
Students attend the Cape Fear Community College IT and Business Career Fair in Castle Hayne, North Carolina. (Allison Joyce/Bloomberg/Getty Images)
Wages compared to prices
During much of the Covid-19 economic recovery, prices have risen faster than paychecks, meaning real wages, adjusted for inflation, have shrunk.
However, the trend has recently started to change and salaries are moving closer to inflation.
Both Zandi and Wolfers expressed optimism that real wage growth will gain momentum in 2024.
“As time passes and inflation remains low, incomes will catch up to and exceed inflation,” Zandi said. “People will start to feel better about things.”
“A million things” could go wrong
Of course, the last few years have reminded us all how unexpected events like the Covid-19 pandemic or Russia’s invasion of Ukraine can ruin the most optimistic forecasts.
More black swans may emerge to cast a shadow over the economic outlook for 2024.
“As we know, there are a million things that could go wrong,” Wolfers said. “Recessions happen.”
Zandi said top of his list of concerns is the risk of further strains on the financial system, such as the bank failures of early 2023.
Another worry that doesn’t let Zandi sleep: the 2024 presidential elections.
The race for the White House will certainly be influenced by the economy (it is the main issue for voters). But the opposite could also happen.
Zandi predicted a hotly contested race and warned that a contested election could lead to uncertainty or even social unrest.
“If that were the case, it could be very damaging to the stock market and the economy in general,” he said.
Still, Wolfers is hoping for a dose of normalcy after a difficult few years for the U.S. economy.
“Every economist’s secret dream is to expect economics to be boring. “I want a 2024 where you never call me because the majority of your viewers have jobs, are comfortable with their income and nothing bad has happened,” he said. “This hasn’t been the story because of the pandemic, but it could be the story next year.”
2024-01-01 23:21:00
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