The US economy appears to be enjoying the soft landing many argued was nearly impossible.
Inflation has cooled dramatically, unemployment remains low and the Federal Reserve could deliver rate cuts as soon as March.
“The big story of 2023 is we stuck the landing,” Justin Wolfers, professor at the University of Michigan, told CNN.
Wolfers noted the economy didn’t just bounce back from the fastest recession ever, but it overcame the war in Ukraine, oil price shocks, political dysfunction and countless other issues.
“It’s the little engine that could,” Wolfers said of the economy. “Given how bad the shocks were, this could have been so much worse.”
The US 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 see than they were a year ago.
‘Remarkable’ inflation cool-down
Many on Wall Street and in Washington expected inflation would cool after hitting four-decade highs in June 2022.
But few anticipated just how fast it would happen. Consumer prices increased by 3.1% year-over-year in November, down sharply from 9.1% in June 2022.
The speed of the inflation cool-down is “remarkable,” economist Ian Shepherdson recently wrote in a report.
Mark Zandi, chief economist at Moody’s Analytics, told CNN he expects inflation will be back near the Federal Reserve’s 2% target by the end of 2024.
After spiking above $5 a gallon in 2022, gas prices eased significantly in 2023. GasBuddy projects the yearly average for US gas prices will fall again in 2024, allowing consumers to spend $32 billion less on fuel than they did in 2023.
Declaring victory over inflation
Inflation has cooled so much the Fed has halted the monster-sized rate hikes that threatened to derail the economy and freaked out investors.
Fed officials are now even penciling in rate cuts for 2024, an outcome which would represent declaring victory in the war on inflation.
Zandi said he suspects the Fed will cut rates four times in 2024, likely beginning in May. Goldman Sachs is betting the Fed could start delivering rate cuts in March.
Rate cuts would bring relief to Main Street, lowering the cost to get a mortgage, get a car loan and carry a credit card balance. Mortgage rates have already plunged from nearly 8% in October to 6.6% at the end of the year.
Blockbuster year for stocks
Cooling inflation, fading recession fears and looming rate cuts fired up Wall Street.
US stocks ended the year with a bang as the S&P 500 rallied nine weeks to end the year – the longest win streak since 2004. The Nasdaq spiked 43%, narrowly missing its best year in two decades.
It’s true the stock market is not the economy. At times, what’s good for Wall Street is not 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.
‘Extraordinarily low’ layoffs
Despite the Fed’s rate hikes, the unemployment rate is sitting at just 3.7%, near a half-century low.
Initial jobless claims, a proxy for layoffs, remain historically low at just 218,000, a sign many employers are reluctant to let go of the workers they have.
“Claims are extraordinarily low,” Zandi said. “For alarm bells to go off, claims would have to be closer to 300,000. We are a long, long way away 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 be fine,” said Zandi. “We are in this kind of virtuous economic cycle.”
Paychecks over prices
For much of the economic recovery from Covid-19, prices have increased faster than paychecks, which means real wages, adjusted for inflation, shrank.
However, the trend has started to shift recently, with paychecks catching up to inflation.
Both Zandi and Wolfers expressed optimism real wage growth will gather momentum in 2024.
“As time goes on here and inflation remains low, incomes will catch up and pass inflation,” Zandi said. “People will start feeling better about things.”
‘A million things’ could go wrong
Of course, the past few years have shown reminded everyone how unexpected developments like the Covid-19 pandemic or Russia’s invasion of Ukraine can wreck the most optimistic forecasts.
It’s possible other black swan events emerge, darkening the economic picture for 2024.
“There are a million things that could go wrong, as we know,” said Wolfers. “Recessions do happen.”
Zandi said his list of worries is topped by the risk of further stress in the financial system like the bank failures in early 2023.
Another concern keeping Zandi awake: the 2024 presidential election.
The race for the White House will surely be influenced by the economy. (It’s the top issue for voters). But the opposite could also be true.
Zandi predicted a very close contest and warned a contested election may trigger uncertainty or even social unrest.
“If that’s the case, that could be very damaging to the stock market and the broader economy,” he said.
Still, Wolfers is hoping for a dose of normalcy after a wild few years for the US economy.
“Every economist’s secret dream is we hope the economy is boring. I want a 2024 in which you never want to call me because most of your viewers have jobs, feel comfortable about their income and nothing bad has happened,” he said. “That hasn’t been the story, because of the pandemic, but it might be the story for the next year.”
Original Article: CNN
