new york
CNN
—
Many feared that 2023 would be the year of the recession. This year has been a year of incredible resilience.
The U.S. economy appears to be enjoying a soft landing that many had argued was nearly impossible.
Inflation has fallen dramatically, unemployment remains low, and the Federal Reserve could cut interest rates as early as March.
“The big story in 2023 is that we failed to land,” University of Michigan professor Justin Wolfers told CNN.
Wolfers pointed out that the economy not only recovered from the fastest recession in history, but also overcame the Ukraine war, the oil price shock, political dysfunction and countless other problems.
“It's the little engine that can do that,” Wolfers said of the economy. “Considering how bad the shock was, it could have been a lot worse.”
The U.S. economy still faces real risks and challenges, from the Israel-Hamas war to the most affordable housing market in a generation. Still, there are concrete reasons to be optimistic about the economy in 2024, and its momentum is more visible than it was a year ago.
Many on Wall Street and in Washington had expected inflation to reach a 40-year high in June 2022 and then subside.
But few expected how quickly it would happen. Consumer prices rose 3.1% year-on-year in November, significantly down from 9.1% in June 2022.
Economist Ian Shepherdson recently wrote in a report that the rate of decline in inflation is “remarkable”.
Mark Zandi, chief economist at Moody's Analytics, told CNN that he expects inflation to return to the Federal Reserve's 2% target by the end of 2024.
After soaring above $5 a gallon in 2022, gas prices fell significantly in 2023. GasBuddy predicts that the annual average of U.S. gasoline prices will fall again in 2024 and that consumers will spend $32 billion less on fuel than they did in 2023.
Inflation has cooled so much that the Fed has halted its monster interest rate hikes that would have derailed the economy and spooked investors.
Fed officials have now decided to even cut interest rates into 2024, an outcome that would declare victory in the fight against inflation.
Zandi said the Fed is likely to cut interest rates four times in 2024, with interest rate cuts starting in May. Goldman Sachs is betting that the Fed will start cutting interest rates in March.
Lower interest rates would bring relief to Main Street, making it cheaper to take out a mortgage, take out a car loan, or carry a credit card balance. Mortgage interest rates have already fallen from nearly 8% in October to 6.6% by year-end.
Calming inflation, waning fears of a recession and looming interest rate cuts excited Wall Street.
U.S. stocks ended the year on a high note, with the S&P 500 index rising for nine weeks, extending its longest winning streak since 2004. The Nasdaq soared 43%, just shy of its best year in 20 years.
It is true that the stock market is not an economy. Sometimes what's good for Wall Street is bad 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.
Despite the Fed's interest rate hikes, the unemployment rate remains at just 3.7%, near the lowest level in a half-century.
New jobless claims, an indicator of layoffs, remain at a historically low level of just 218,000, indicating that many employers are reluctant to let go of workers. There is.
“We get very few complaints,” Zandi said. “The number of insurance claims needs to approach 300,000 for alarm bells to ring. We are far from there.”
If this trend continues, it will support consumer spending, the main driver of the U.S. economy.
“As long as there are relatively few layoffs, the economy will be fine,” Zandi said. “We are in this kind of economic virtuous cycle.”
For much of the economic recovery from COVID-19, prices have been rising faster than wages, meaning real wages, adjusted for inflation, have been shrinking.
However, recently that trend has started to change, with salaries starting to catch up with inflation.
Both Zandi and Wolfers expressed optimism that real wage growth will gain momentum in 2024.
“Over time, if inflation remains low, incomes will catch up and outpace inflation,” Zandi said. “People will start to feel better about things.”
Of course, the past few years have reminded everyone how unexpected developments like the coronavirus pandemic and Russia's invasion of Ukraine can shatter optimistic predictions.
There are other black swan phenomena that could darken the economic situation in 2024.
“As we know, there are millions of things that could go wrong,” Wolfers said. “Recessions are bound to happen.”
Zandi said at the top of his list of concerns is the risk of further stress in the financial system, such as a bank failure in early 2023.
Another concern that wakes Zandi is the 2024 presidential election.
The White House race will undoubtedly be influenced by the economy. (This is a top issue for voters). However, the opposite may also be true.
Mr. Zandi predicted a close race and warned that the race could cause uncertainty and civil unrest.
“If that happens, it could cause significant damage to the stock market and the economy as a whole,” he said.
Still, Wolfers is hopeful for some semblance of normalcy in the U.S. economy after years of turmoil.
“Every economist's secret dream is to wish the economy was boring, because most of the viewers have jobs, are happy with their incomes, and nothing bad is happening. I hope it’s 2024 when people don’t want to call me,” he said. “We haven’t heard that yet because of the pandemic, but it could be next year.”
