There’s been some good economic news as we end 2023. Gas prices are down almost 60 cents per gallon since September. Thanksgiving meals were more affordable due to a 20% drop in turkey prices compared to 2022. The all-item inflation rate continues to moderate, and the Federal Reserve (the “Fed”) has not raised their key interest rate since August. Also, in the labor market, the jobless rate has remained under 4% all year.
There are easy explanations for these results. Gas prices usually drop during the fall and winter months as people drive less. The avian flu that sent turkey prices skyrocketing last year no longer impacted flocks this year. The Fed’s policy of raising interest rates to slow spending and take pressure off prices seems to be working. The all-item year-over-year inflation rate in October was 3.2%, significantly lower than the 9.2% rate in the summer of 2022. A fixed supply chain has also helped. Perhaps the best news is the economy did not slip into a recession in 2023.
Still, with all this upbeat information, two questions need to be addressed. First, will the good news at the end of 2023 persist into 2024? And second, if the economic news is so good, why do polls show most people are still unhappy with the economy?
Here are my forecasts. I think the Fed is done raising interest rates. The Fed is happy with the current path of inflation. The Fed’s goal is a 2% year-over-year inflation rate, similar to the 2019 rate prior to the pandemic. The Fed believes they could be close to that rate by the end of 2024.
But I predict the Fed will wait until the middle of 2024 to begin reducing their key interest rate, and, once they start, the rate reductions will be modest. Also, don’t look for the historically low interest like existed in 2020 and 2021 to return. The Fed pushed interest rates to extraordinarily low levels to counter the Covid recession and accelerate the recovery.
What about a recession in 2024? Before I answer, here’s some important background on the definition and designation of a recession. A recession is defined as “a broad-based decline in economic activity that lasts for a significant period of time.” The group that determines if a recession has occurred is not based in the federal government. Instead, the task of designating a recession has been given to a private think tank, the National Bureau of Economic Research (NBER). Economists at the NBER constantly pour though data to spot if economic changes qualify as a recession.
There is a rule of thumb that a recession has occurred if the broadest measure of the economy — inflation-adjusted gross domestic product (GDP) — declines for two consecutive quarters. But the NBER doesn’t necessarily use this rule. GDP dropped for two straight quarters in 2021, but no recession was called.
I forecast the economy will be challenging in the first half of 2024 for two reasons. The cumulative impacts of the Fed’s previous rate hikes will be felt. Second, with consumers having spent most of their Covid relief money, combined with high consumer debt and continuing high interest rates, consumer spending will slow and maybe fall. Since consumers are the main driver of the economy, there will be a consequent slowdown in total economic activity. But hopefully it will be a “slowdown” and not a recession.
Afterward, there will be a rebound in the economy in the second half of 2024 as the Fed reduces interest rates. As rates drop, consumer spending will come back.
Finally, what about the polls showing people still upset about the economy, despite recent good news. I think the explanation is easy. Data show that even with the better news on inflation, compared to 2019, worker earnings have still risen less than prices. Translated, standards-of-living are still below pre-pandemic levels. Until this changes, attitudes about the economy won’t improve.