The post-COVID-19 economy was finally supposed to stop defying gravity and topple into a recession this year.
Instead, the stock market is roaring on the growing belief that the Federal Reserve is on track to wrestle down inflation without causing a downturn, a rare feat known as a “soft landing.”
To be sure, growth is expected to slow amid the delayed effects of the Fed’s aggressive interest rate hikes, the depletion of households’ excess pandemic savings and a pullback in federal government spending.
But other factors are likely to keep the economy afloat, forecasters say, including near-record home and stock prices, a further easing of inflation to or near the Fed’s 2% goal and the central bank’s tentative plans to cut interest rates more sharply than previously anticipated.
“2023 was a very good year,” says Mark Zandi, chief economist of Moody’s Analytics. “2024 will just be a good year.”
A flurry of developments in recent weeks has brightened the outlook. The Fed said it’s probably done hiking rates to fight inflation and is penciling in three rate cuts in 2024, a strategy that would lower borrowing costs for consumers and businesses. Inflation has slowed more dramatically than expected, validating the Fed’s turnabout.
And a stock market that was already surging on an improved inflation picture rocketed higher after the Fed’s pivot.
“It was like pouring gasoline on a fire that was already burning,” Scott Anderson, chief U.S. economist of BMO, wrote in a note to clients.
Forecasters expect the economy to grow 1.3% this year, down from a projected 2.4% in 2023 but above their 0.7% estimate in July, according to a survey by Wolters Kluwer Blue Chip Economic Indicators. Meager gains in the first half of the year should give way to stronger output by fall as the Fed slices rates further, forecasters say.
The 3.7% unemployment rate – modestly above a 50-year low − is projected to rise to 4.2% by the end of 2024, well below economists’ 4.8% estimate a year ago.
Keep in mind the Wolters Kluwer poll was conducted in early December, before the Fed news on Dec. 13.
Some top economists have since revised their estimates. Richard Moody, chief economist of Regions Financial, has bumped up his GDP growth forecast to 1.9% from 1.6%. Zandi, who says he always believed inflation would retreat and the Fed would shift its stance, is sticking to his 1.8% prediction.
GDP growth of just under 2% is far from robust but it would be close to the decent 2% average in the decade before the pandemic. Normally, a big drop in inflation requires a dramatically cooling economy as softer consumer and business demand leads companies to lower prices and employees to accept smaller pay raises.
But nothing has been normal about the post-pandemic economy, which vaulted 5.8% in 2021 as it emerged from the COVID-19 recession. The boom came with product and worker shortages that sent prices soaring. But inflation is now easing as those supply driven troubles unwind – even without a big drop in demand. Economist Paul Ashworth of Capital Economics calls the development “almost unprecedented.”
There are risks.
Inflation could fall more gradually than expected, prompting the Fed to keep its key rate higher for longer. That could hamper growth and possibly even nudge the nation into recession or "stagflation," a toxic mix of a weak economy and high inflation, Ashworth says. The delayed impact from the Fed’s 5.25 percentage points in rate hikes since early 2022 – the most in 40 years – could hobble the economy more than believed.
And global shipping snarls resulting from military conflict in the Red Sea could push prices still higher.
But there’s also a chance that inflation tumbles more rapidly, spurring the Fed to trim rates sooner and faster so that inflation-adjusted rates don’t increase, Goldman Sachs says. Futures markets are forecasting six quarter-point rate cuts in 2024, double the Fed’s estimate.
“We see the upside and downside risks as balanced,” Moody of Regions says. “Previously, we saw the downside risks as dominant.”
In other words, an economy that sizzles again now appears just as likely as one that slumps.
How different parts of the economy are likely to perform in 2024:
American shoppers have more than done their part to sustain an economy fueled mostly by their purchases. But their pent-up demand from the pandemic is fading and their savings from federal stimulus checks and hunkering down at home are dwindling, Moody says, especially for low- and middle-income consumers.
Those households also have built up record credit card debt to cope with high prices, curtailing their spending even as banks tighten lending standards, says Gregory Daco, chief economist of EY-Parthenon.
Meanwhile, Daco says, job and wage growth are set to slow as the economy cools, providing consumers less cash to spend. High interest rates also should constrain spending, at least until the Fed starts cutting.
But there are also encouraging signs.
Average annual wage growth is set to fall from 4% toward the Fed’s 3.5% target, but inflation will likely come down even more rapidly, Zandi says. That, he says, should give households more purchasing power.
And recently strong growth in productivity – or output per worker – could allow employers to keep doling out healthy raises without hurting profits, Zandi says.
Although low- and moderate-income Americans are squeezed, higher-income consumers have more pandemic savings and are benefiting from near-record home and stock prices, Zandi says, making them feel wealthier and prompting them to splurge. The top third of income earners account for nearly two-thirds of overall spending while the bottom third make up a tenth, Zandi says.
The bottom line?
Consumer spending should rise 1.4% in 2024 following 2.2% growth last year, according to the Wolters Kluwer survey. Zandi expects a stronger 2% gain.
Slower consumer spending and a cooling economy should reduce average monthly job gains from a projected 216,000 in 2023 to just 53,000 this year, according to Zandi.
Moody and Goldman Sachs are more sanguine, predicting monthly additions will average about 100,000 – enough to keep the 3.7% unemployment rate from rising.
Zandi agrees there’s a chance payroll growth could be stronger if immigration stays robust instead of declining as expected. That would continue to boost the labor supply and hiring while keeping a lid on pay increases and inflation.
Some hot industries plan to hire lots of workers this year.
Point in Time Studios, a video production company that specializes in virtual reality and 3D animation, expects sales to grow 75%, in part, because of the artificial intelligence frenzy, says company President Rami Kalla. He says the company, based in Tempe, Arizona, will add up to 10 employees to a staff of 25.
And Healthy Technology Solutions, which provides computer systems and services to hospitals and high-end builders, will add four or five employees to its 12-person staff, says Leo Bletnitsky, president of the Las Vegas-based company.
“When all the (large) tech companies were laying people off, it made (job candidates) a lot more available,” he says.
But Robert Brill, CEO of Brill Media, a Los Angeles-based digital advertising company, says sales were down the past two years after soaring in 2021. Higher borrowing costs, he says, have made many businesses wary of taking on new projects.
“I think companies are becoming way more frugal,” Brill says, noting he expects that to change when the Fed lowers rates. For now, he has no plans to add to his 20 staffers.
Morgan Stanley reckons the Fed’s preferred core inflation measure, which strips out volatile food and energy items, will fall to 2.4% by the end of the year, from 3.2% in November and a high of 7% in mid-2022. Ashworth predicts it will drift close to the Fed’s 2% target by mid-year, prompting officials to start shaving rates in March.
But Morgan Stanley says rent hikes, the largest contributor to inflation, will fall slowly, keeping inflation elevated longer and delaying the Fed’s first rate cut to June.
The Biden Administration’s sweeping legislation to encourage infrastructure, green energy and computer chip development in the U.S. has pumped billions into the economy. But spending cuts are expected in 2024 as part of Congress’s November deal to avert a government shutdown.
Zandi expects a 4% decline in non-defense spending following a 4.8% rise in 2023.
While high interest rates will likely dampen business capital spending in the first half of 2024, falling Fed rates could spark a rebound later in the year, economists say.
Broadly, businesses will invest in equipment and structures to the extent consumers keep buying their products and services, Zandi says.
He expects business investment to rise but at less than half of 2023's 4.4% pace.
Single-family housing starts were weak last year, mostly because of mortgage rates that approached 8%.
But rates recently fell below 7%. And with existing homeowners reluctant to sell because they would have to buy another house at a much higher mortgage rate, demand for new homes is strong.
After hurting economic growth last year, housing should provide a boost in 2024, says Gus Faucher, chief economist of PNC Financial Services Group.