After defying the odds in 2023, economists are being cautious about 2024.
Chastened by an economy that outfoxed their predictions in 2023, economists are taking a cautious approach to 2024.
The consensus is calling for a slowing down of growth, perhaps a mild recession, and an economy marked by lower interest rates and lower inflation. A few are sticking their necks out, saying the economy could be stronger than expected or that interest rate cuts could come sooner and be more numerous.
“Looking into 2024, economic conditions are expected to deteriorate modestly, though real GDP growth and the pace of job gains are expected to remain positive, and inflation is expected to decline to around 2.5%” is how Kevin Kliesen, a business economist and research officer at the Federal Reserve Bank of St. Louis, puts it. “This outcome, should it occur, would seem to vindicate those who have long believed in the possibility of a soft landing for the economy.”
Key to the forecasts are a shift in Fed policy, as the central bank hinted at in its December meeting, from the rapid rise in interest rates that characterized the last 18 months. At the same time, the surge in inflation that occurred starting in 2022 is projected to become a trickle as 2024 progresses.
That’s not to say that economists believe things will return to the pre-pandemic era of extremely low inflation and interest rates.
“We believe that interest rates will remain above the rate of inflation.” said Andrew Patterson, senior international economist at Vanguard. “The days of ultra-low interest rates are over, and we have greater conviction in this view than we did just a year ago.”
That means savers will be rewarded for their prudence and long-term investing could return to favor after several years of momentum stock-picking, adds Patterson, saying that “an era of sound money, where savers earn positive real returns and borrowers need to carefully weigh capital costs, is with us for the foreseeable future.”
The key difference in 2024 for most Americans will be the moderation in inflation. After seeing consumer prices spike to a 9% annual level of inflation in mid-2022, the level of inflation has fallen to around 3% and is expected to decline further next year down to the mid-2% range or lower. Prices will still be going up, and from inflated levels, but the rate will be closer to levels that are more in line with pre-pandemic history. Interest rates, having peaked in 2023, will be on the downward trajectory even if they settle at a higher level than before the COVID-19 era.
“These two dynamics of robust employment and falling inflation will result in notable gains in real disposable income for American households and will be the difference between the solid expansion that we forecast and a more modest pace of growth closer to 1%,” said RSM US economists.
Mortgage rates are likely to settle in the 6% range or lower following a surge to 8% this year. That will improve the outlook for a housing market that has shown signs of life recently. Demographic changes will be at the forefront of demand in 2024 as baby boomers continue to sit on houses with 3% and below mortgage rates and older millennials enter the key time of their careers. The average age of a new homeowner is now 36, up three years from 2021.
“Boomers are going to be in charge of the market for the next 10 years or so,” says Lisa Sturtevant, chief economist at Bright MLS.
Supply chains battered during the pandemic are mostly back to normal, and evidence of that is the fact that car dealers are offering incentives as their lots are full again.
The labor market is predicted to cool after proving far stronger than expected in 2023. Monthly job gains are forecast to hit around the 100,000 mark after being more than double that for much of 2023. The unemployment rate could tick up to 4% or so from its current 3.7% level.
One development that offers promise is that productivity has picked up recently, reaching the 4.7% level in the third quarter and advancing at a 4% rate in the past six months. Companies have been investing heavily in new manufacturing capacity, as well as in new technologies such as robotics and artificial intelligence.
“The share of manufacturing facilities being built as a percentage of total nonresidential construction has soared in the last three years since the COVID pandemic,” said Richard de Chazal, chief macro analyst at William Blair. “This is now at the highest level in at least two decades, and the trend toward reshoring is likely to continue.”
AI is all the buzz now, driving outsized gains in the top technology stocks in 2023, but some caution is warranted, says Takahide Kiuchi, a former Bank of Japan monetary policy official and executive economist at the Nomura Research Institute.
“The impact should not be exaggerated,” Kiuchi says, adding that “the silicon cycle is moving upward right now” although he doubts it will be great enough to offset an overall slowing of the U.S. economy in 2024.
Pessimists will certainly find enough to cast doubt on the 2024 forecasts. It is an election year, after all, and this one is shaping up to be another critical contest between two sharply different views on how to govern and economic priorities. Even though there is plenty of time for the narrative to change, at the moment the 2024 presidential election is looking like a repeat of the 2020 contest between Joe Biden and Donald Trump.
Although Biden has disappointed progressives within the Democratic Party, he has governed as an interventionist in the economy, pushing domestic manufacturing, clean energy and providing help to lower-income households. Trump is campaigning as a friend of the rich, promising tax cuts that would likely empower wealthy earners while also touting more tariffs on imported goods, a policy that is generally harmful to American consumers.
The geopolitical arena is as hot as ever, with conflicts in the Mideast and Europe raging and lower temperature jousting in Asia a constant threat to world peace. Recent drone attacks on commercial shipping interests in the Red Sea and Suez Canal region have raised specters of an energy shock or a broader, regional conflict. A slowing economy in China, the world’s second largest, is also a risk factor for overall global growth.
“Coming into 2023, we had a relatively sanguine outlook in terms of geopolitics,” State Street Global Advisors said in its 2024 outlook. “Looking ahead into 2024, however, we consider that the coming year is fraught with potential fracture points, particularly around territorial conflicts and geopolitically critical elections. In total, we consider they pose enough risk to be more inflationary, thereby derailing the disinflation trajectory and disrupting terms of trade for large economies. In short, geopolitical events could deliver smaller stagflationary impulses.”
In summary, the risks are there for an otherwise moderately positive forecast for 2024. The U.S. economy surprised most people in 2023. Whether it can do so again is the question that will remain to be answered.
