For a lot of reasons, we should be feeling good about the economy as 2024 begins.
The U.S. economy has been expanding since the middle of 2022. Growth accelerated in the third quarter of 2023 with U.S. GDP increasing at an annual rate of 4.9%. The Federal Reserve Bank of Atlanta projects that growth continued in the fourth quarter of 2023, at a rate of 2.4%.
The labor market remains very healthy. The U.S. unemployment rate was at 3.7% in November. The rate has been below 4% for 22 consecutive months.
The stock market had a great year in 2023, with the Dow Jones Industrial Average gaining 14%, the S&P 500 gaining 24% and the Nasdaq gaining 43%. The Dow Jones and S&P hit record highs in December.
But despite those strong economic indicators, many Americans are unhappy about the economy. They were stung by inflation, which peaked at 9.1% (year-over-year) in June of 2022. Inflation slowed to 3.1% in November, but the accumulation of high levels of inflation since spring of 2021 has left some consumers, who remember what things used to cost, with lingering unease and longing for a pre-pandemic shopping experience.
According to The Conference Board, consumer confidence in the U.S. plunged in 2020 during the COVID-19 pandemic, rebounded in 2021, and then fell again as high levels of inflation hit the economy. Consumer confidence has improved recently but remains significantly below pre-pandemic levels.
No doubt politics plays a big role in economic sentiment. This is a presidential election year and President Joe Biden is trying to make the case that the economy is strong, and that he deserves credit, while his Republican critics have harped on inflation and the impact of interest rate hikes to combat it, pointing the blame at Biden.
Many had expected those interest rate hikes to push the economy into a recession by now. They have slowed economic growth, as intended, but have not yet sent us into a recession, but that still could happen. There are signs that the economy will pull through with a soft landing and avoid a recession, but many Americans still don’t feel the joy that the GDP, unemployment rate and stock market would suggest.
What lies ahead for 2024? Will this remain the economy we love to hate, or will consumer confidence catch up with the economic growth that is occurring? Will the Fed be satisfied that inflation has been defeated and shift to cutting interest rates, sparking more economic activity and providing a boost for consumers and businesses? To answer those questions and more, we once again turn to Michael Knetter, Ph.D., president and CEO of the University of Wisconsin Foundation and an economist who served as an economic advisor to President George H.W. Bush and President Bill Clinton. Following is editor Andrew Weiland’s annual Q&A with Knetter, who again spoke at the BizTimes Media Economic Trends event on Jan. 25.
BizTimes: Heading into 2023 many were concerned that a recession was coming during the year. It didn’t happen. By the middle of the year, optimism was growing for a soft landing. Now, how does 2024 look to you? Will we fall into a recession or skate by with a soft landing?
Knetter: “I think we will skate by with a soft landing as my base case. Things could go awry of course, and one way would be escalation in the Middle East that causes an oil shock making inflation more stubborn than currently expected and forcing the Fed into a more hawkish mode. The election year helps that call as the executive branch is motivated to take steps that boost the economy.”
What’s your GDP prediction for 2024?
“2.0% real GDP growth.”
By comparison, U.S. GDP grew at an annual rate of a robust 4.9% in the third quarter, after growing 2.1% in the second quarter and 2.2% in the first quarter of 2023. In addition, the U.S. unemployment rate is at 3.7% and the Dow Jones Industrial Average recently reached a new all-time high. That all sounds like good economic news to me. So, why do you think so many Americans are so unhappy about the economy? Why is this the economy we love to hate?
“Two big things. Inflation rose ahead of wage growth and the price level has risen more than incomes for many people. So, real wages are down. For a time, government support during the pandemic papered over this problem. But wages are rising now, inflation is cooling and the labor market is strong. So, sentiment is actually pretty good in surveys. Another reason we love to hate the economy is everyone has been predicting recession and the media need to write stories that get eyeballs. The story that everything is fine doesn’t get eyeballs. Human nature. A good example is that the Conference Board reported in December that consumer confidence regarding current and future conditions both rose significantly. This didn’t get picked up much in media outlets because we are too busy hating on this economy. The actual level of confidence in the report was higher than any reading between 2010 and 2017. And also, higher than the early aftermath of the pandemic.”
Even though inflation has slowed down considerably from its peak in 2022, consumers are still shell-shocked and have not forgotten what things used to cost. But consumer spending remains strong, correct? How long will consumer spending be able to power the economy before they have taken on too much debt and are tapped out?
“This is a central question for the potential of a soft landing (i.e., inflation back to target without inducing recession). Spending remains solid, debt is rising and debt service is higher with the higher interest rates. But people are back working and earning so I think we can continue on a steady path to target inflation without a recession, provided there are no big disruptions (e.g., Middle East conflagration that produces an oil shock).”
Quarterly Real GDP Growth
The Fed increased interest rates several times to combat inflation. Higher borrowing costs are clearly causing some challenges for businesses. We are seeing several building projects stalled as developers are trying to put together financing. But the Fed has put the brakes on interest rate hikes and is hinting at cuts this year. What do you expect the Fed to do in 2024, and what impact will that have on the economy?
“Barring negative surprises, I think we will see a couple of rate cuts in 2024 and some normalization of rates, with long rates settling around 4%.”
What level of inflation do you expect in 2024?
“By year end I think we can be around 2.5%, which is close to target.”
Do you think businesses will be able to adapt to the new normal of higher interest rates?
Year-Over-Year Inflation
“Good businesses will adapt and others will fall prey to natural selection, freeing capital for better ones.”
Will the labor market remain strong in 2024 or is there going to be a slowdown in hiring and an increase in unemployment? How much wage growth do you expect next year?
“I think wage growth will remain strong for at least the first half of the year before abating. I think unemployment might tick up somewhat this year but believe we can finish the year below 4.5% which by historical standards is very good.”
What direction is the remote work trend going and how will that impact the economy, particularly commercial real estate? Are we in danger of a commercial real estate collapse if the demand for office space remains soft, tenants close or downsize their offices and commercial real estate loans come due?
“I think work from home is here to stay, maybe somewhat moderated from current levels. But the way it is playing out, firms still want people in the office a couple days a week, and it is usually on the same days. As long as that is true, it is hard to shed office space. It is not going to be a great time for commercial real estate, but I am also not predicting a ‘collapse.’”
What’s going to happen with residential real estate? Affordability is a major problem. Any hope for relief there? There is a shortage of new homes under construction and existing homes listed for sale to meet demand. Do you think we’ll make any progress to address the need for more housing supply in 2024?
“Time and the Fed will heal these wounds. The sharp uptick in rates had existing homeowners locked into their homes. Selling a home and paying off a 2.8% mortgage and then buying and financing at 7% isn’t appealing. But existing homeowners will start to sell again gradually, and we will see the market normalize especially as the Fed takes down rates a bit.”
Wisconsin Labor Market
Gas prices have come down significantly recently, providing much-needed relief to consumers. Will they stay there in 2024?
“This will depend on the situation in Ukraine and the Middle East, which could produce supply shocks, as well as China’s economic performance, which will impact demand. I expect current prices to be the base case.”
Are there any other areas that we could see price declines?
“I think housing will continue to ease as rates come down.”
After a lot of angst about the stock market in 2022, the market recovered in 2023 and a strong run late in the year pushed the Dow Jones Industrial Average and the S&P 500 to new highs. How do you think the market will perform in 2024?
“I think the market is a bit rich now and wage growth is going to be stronger than pricing growth for a period of time. That will squeeze profits and could cause a sideways market this year. It is of course an election year and that can bode well for markets if the executive branch can take actions that boost the economy and sentiment.”
You’ve already touched on this some, but how are significant geopolitical events, including the war in Ukraine and the bitter conflict between Israel and Hamas, affecting the economy now, and what impact do you think they will have throughout 2024?
“Markets have digested the Russian invasion of Ukraine. The supply shocks associated with that have been for the most part absorbed and we have adjusted. The Israeli-Hamas battle has almost no direct effect on the global economy, but events on the periphery could be more significant, especially if shipping is disrupted in the Red Sea as the Houthis are attempting to do.”
