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In his press conference Wednesday after the Federal Reserve’s last meeting of the year, Fed chairman Jerome Powell offered a mildly upbeat take on the current state of the U.S. economy, pointing to the fact that inflation is well off its highs, while unemployment has stayed low, and calling that “very good news.” Powell also suggested that the Fed is now at least considering the possibility of cutting interest rates (or, as he called it, “dialing back policy restraint”) sometime in the future. But then he added a cautionary note. “The path forward,” he said, “is uncertain.”
And so it is. Forecasts are, of course, always uncertain. (As Yogi Berra said, “It’s tough to make predictions, especially about the future.”) But trying to understand where the U.S. economy is headed in 2024 feels particularly hazy at the moment.
There are lots of reasons to be optimistic that the economy will remain as resilient as it’s been, and that the current expansion will continue. But there are some important wild cards that could complicate that picture. A year ago, analysts and pundits were mostly convinced of what the year ahead would look like—they all thought, wrongly as it turned out, that the Fed’s interest-rate hikes would raise unemployment and tip the economy into recession. Today, the range of forecasts seems wider (predictions of where the S&P 500 will end 2024, for instance, go from 4,200 to 5,500), because the uncertainty, paradoxically, feels greater.
Even so, it’s worth beginning with those reasons for optimism, the most important of which is that the economy’s fundamentals—the employment rate, real wages, business investment, corporate profits—are all in good shape, more than three years into the post-pandemic recovery. All those recession forecasts for 2023 proved to be wrong, and the Fed so far seems to have pulled off a fabled soft landing—inflation has been cut by more than half, to around 3%, without denting economic growth, while unemployment has stayed below 4% all year. Indeed, in the third quarter, GDP growth came in at a more-than-robust 5.2%, and while the economy has likely slowed since then, it created another 200,000 jobs just last month.
Beyond that, real wages for most Americans outpaced inflation in 2023, easing the pain of higher prices. And while earlier estimates suggested that the so-called “excess savings” Americans had piled up during the pandemic had been mostly depleted by the summer, updated work by the Bureau of Economic Analysis suggests that, as of this fall, Americans still had more than a trillion dollars in excess savings, helping bolster consumer spending. Businesses are also continuing to invest—the race for AI has revived tech R&D investment, which could total more than $200 billion in the year ahead, while the Inflation Reduction Act has incentivized clean-energy investment at home.
There are other good signs, too. Gas prices—which have an inordinate impact on consumer sentiment—have fallen almost 20% in the past three months, and are now below $3 a gallon in much of the country. Mortgage rates, while still very high by recent standards, have come down quite a bit. And the stock market has been buoyant of late, and is now up roughly 20% on the year. That’s a positive sign, both because it’s boosting Americans’ retirement accounts (and therefore their moods), but also because it suggests that investors are feeling good about business prospects for the year ahead.
If those are all the positives, what’s there to worry about? First, and most obvious, is that inflation could persist, and that the Fed could decide it needs to go back to hiking interest rates in order to bring it down. That seems much less likely after yesterday’s news from the Fed—the consensus forecast from Fed members is now that there will be three rate cuts next year. But as Powell said, “the economy has surprised forecasters” before.
The second concern is whether the American consumer will continue to spend. Despite the strong economy and the robust job market, consumers have been remarkably gloomy all year—consumer-sentiment numbers from the University of Michigan are near where they were in 2009, at the depths of the Great Recession, and in a recent NYT/Siena poll, 81% of those surveyed said the economy was just “fair” or “poor.” So far, though, that gloom has not had much of an impact on actual consumer behavior: people have continued to spend briskly, including on non-necessities.
The question, really, is whether that will last, or whether Americans’ unhappiness with the economy will lead them to hunker down and cut back on spending, which would help send the economy into reverse. It’s also possible that the opposite will happen—as we get further away from the high inflation of 2021 and 2022 and real wages keep rising, consumers’ moods could improve. But if they don’t, it’s reasonable to worry about the possibility that consumers’ conviction that the economy is in bad shape will help put the economy in bad shape.
Finally, there’s one other wild card, namely Donald Trump and the 2024 election. At this point, it seems safe to assume that Trump and Biden will be the two parties’ nominees, but we have no idea whether Trump will be on trial for any of his various criminal indictments, or how the inevitable craziness of this campaign will affect the decisions consumers and businesses make. Given that the economy did well under Trump and has done well under Biden, it may well be that things will hum along, indifferent to the outcome of the election. But this is a true “wait and see” moment.
In the end, if one had to bet, the reasonable bet (which is in effect the one the stock market is making) is that the economy’s solid fundamentals will keep it buoyed, and that as long as unemployment stays low, and wages keeps rising, Americans will keep spending and the economy will keep growing—even if they’ll also keep complaining. That’s the ideal scenario: 2024 looking much like 2023. The plane is coming in for that soft landing. The hope is that none of these uncertainties blow it off course.
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