The economy in 2024: A soft landing is in sight, but not without some danger ahead
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The domestic economy heads into 2024 looking to escape the shackles of a recession specter that has been hanging over the U.S. for the past two years. That might not be so easy. After all, many of the same fears that have shadowed the economy in the post-pandemic recovery remain: high prices, tight monetary policy and an uncertain geopolitical landscape. Even if the U.S. avoids an actual recession in the year ahead, finding escape velocity is likely to still be difficult. “We have a diminishing impact of all the fiscal stimulus, combined with the lagged impact of all the monetary tightening,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “All that would tend to spell lower growth going forward — not necessarily a recession, although I wouldn’t rule out a mild recession at some stage of the game given how tight Fed policy is.” Indeed, the Federal Reserve for nearly two years has been aggressively trying to slow down the powerful $27.6 trillion U.S. economy, with a smattering of success. Inflation, the key factor motivating central bank policy, has receded markedly from its mid-2022 peak to about 3.2% by a gauge the Fed watches closely. While progress has been made, that’s still above the central bank’s 2% target. The employment picture , while not quite as robust as in the days following the worst of the pandemic-induced recession, is still vigorous, with another 2.5 million nonfarm payroll jobs added this year and a healthy 3.7% unemployment rate. All that has come with the Fed hiking rates another full percentage point in 2023 and a combined 5.25 percentage points since 2022. Still, there are only scant signs of a potential recession. With the Fed expected to start cutting rates in the year ahead, hopes are rising that the U.S. again can dodge the recession bullet. Path to a soft landing “Clearly, a year ago everyone was on high alert, hair on fire,” Mark Zandi, chief economist at Moody’s Analytics, said Thursday on CNBC. “The pessimism is fading away.” Yet for 2024, as Zandi noted, many economists still think the U.S. runs the risk of a recession. “Maybe that’s going to change as we move forward here pretty quickly, but [there’s] still some pessimism out there,” he said. From their point of view, Fed officials largely think the U.S. will avoid a contraction. Members of the Federal Open Market Committee in mid-December estimated that gross domestic product will grow at a 1.4% annualized rate in the year ahead, down almost in half from the 2.6% projection for 2023. While such soft growth may sound bleak on its face, it’s actually in keeping with the central bank’s “soft landing” scenario it had hoped to achieve when it launched its war on inflation in March 2022 with the first interest rate hike of this cycle. It’s also largely the opposite of what most economists thought would happen. Wall Street had been looking for at least a mild recession, the product of tightening monetary policy that included not only a series of 11 rate hikes but also a rundown of the Fed’s balance sheet that so far has totaled nearly $1.2 trillion. Now? Wall Street has largely changed its tune, expecting the Fed to defy historical trends and tame inflation without wrecking the economy. The most prominent optimists on the Street are at Goldman Sachs, whose economists see growth in 2024 at closer to a 2% clip, about the long-term norm and around double the consensus, as the Fed begins cutting rates and consumers continue to power ahead despite daunting debt loads and nagging higher prices. “Our most out-of-consensus call for 2024 is our growth forecast,” Goldman economists Alec Phillips and David Mericle said in a recent client report. “This reflects our view that the growth impulses from changes in financial conditions and changes in fiscal policy should be modest and roughly neutral on net next year. It also reflects our forecast that consumer spending will easily beat expectations … because real income should grow about 3% and household net worth is close to an all-time high.” On the latter point, household net worth has risen more than $7 trillion since the end of 2022, up to $151 trillion, largely on the back of a solid rally in the stock market , according to Fed data. The S & P 500, buoyed by the performance of seven Big Tech stocks, has notched a nearly 25% gain as investors prepare for a lower-rate world and at least a break in price increases. Despite rising credit card balances, which topped $1 trillion in 2023 , household debt has risen less than 2% through the first three quarters of the year. Not quite victory Goldman expects the good times to roll into 2024 and recession risk to be right around the long-term average. “We continue to see only limited recession risk and reaffirm our 15% US recession probability,” the firm said in its 2024 forecast released in early December. “We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts if growth slows.” Above almost everything, markets are betting that an accommodative Fed will help pave the way for a stronger economy and another solid investing climate. Traders in the fed funds futures market are pricing in the likelihood of six quarter-percentage point rate cuts in 2024, according to the CME Group’s FedWatch gauge. Should Fed officials stick to their own unofficial forecast of three cuts , that could rile markets and shake confidence. “Markets are reflecting a ‘Goldilocks’ scenario in 2024, where activity and inflation cool gently to a sustainable pace. We do not share this optimistic outlook,” Citi economist Andrew Hollenhorst wrote recently. “Early signs suggest that the rapid rise in policy rates over the last two years – and need to hold them there to bring down inflation – will lead to a recession next year.” Similar predictions for a recession in 2022 and 2023, however, failed to hold up. Economic optimists are hoping that the inflation data continue to show progress, allowing the Fed to take its foot off the brake and allow the economy to absorb the lagged effects of the rate hikes. “I feel very confident that we’re going to see inflation back close to the Fed’s target by this time next year,” Zandi, the Moody’s economist, said. “So all the trend lines look really good here. But [it’s] still probably a little early to declare victory.”
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