It’s okay to be optimistic about the economy next year

Stack of US $1 bills with bills flying away on yellow shelf, green background.
Pssst … there’s a case for feeling good about money in 2024. | PM Images via Getty Images

A recession didn’t come in 2023 and it might not in 2024, either.

I’m going to throw out a wild idea here: What if the economy is good in 2024? I know, I know, prices are still too high. Everybody hates everything so much that we’ve coined the term “vibecession.” The pandemic fallout is still reverberating. But hear me out — maybe it would be neat to head into the new year without all the doom and gloom.

There is a case for hope here. I mean, look at what happened in 2023. We came into the year with the lowest of expectations. Tons of economists, including some big names, thought a major downturn was inevitable in the United States. Many people were sure the Federal Reserve’s fight to get inflation down would mean a significant spike in unemployment; the logic was preordained. In fall 2022, Bloomberg ran a headline forecasting a 100 percent chance of a recession within a year.

As it turns out, there’s never a 100 percent chance of anything. That surefire 2023 recession never came. Despite the negative sentiment around the economy — sentiment that mayyybe is starting to turn around — things this year were really good. Inflation came down. The jobs market stayed strong. Consumers, in aggregate, kept spending. The US economy grew at a surprisingly strong rate. After a tough 2022, stock market investors had a solid time.

“2023 wasn’t supposed to happen,” said Claudia Sahm, the founder of Sahm Consulting and a former economist at the Federal Reserve. “For inflation to come down that much, unemployment’s been below 4 percent for the longest stretch since the 1960s, and growth — inflation-adjusted consumer spending is just knocking it out of the park.”

There definitely are worse ways to head into 2024.

Come over here, let me tell you a nice little story about next year

The US economy is not out of the woods. We haven’t yet reached that coveted “soft landing,” where inflation gets back to the Fed’s 2 percent target without tipping the economy into recession. That outcome does seem possible — I’m not saying it’s going to happen, but there’s some room for optimism.

The stock market is feeling really excited about the year ahead — arguably, maybe a little too excited

Predictions obviously can be wrong — again, see 2023 — but many economists feel quite positive looking ahead. Goldman Sachs sees just 15 percent odds of a recession over the next 12 months and thinks the economy is on its “final descent” to a soft landing. Bank of America is making a similar call. The Fed likes what it’s seeing and is hoping for more of it in 2024. It’s anticipating three interest rate cuts next year.

“It should be a good year. Probably not as good as 2023,” said Mark Zandi, chief economist at Moody’s Analytics. (Seriously, by most traditional economic measures, the 2023 economy was very good.) He pointed out that he wasn’t among the group expecting a recession this past year — when you’re on the right side of a bet, you may as well enjoy it — but that even he wasn’t anticipating this. “The big surprise was the supply side of the economy. Productivity growth revived and labor force growth surged, so that allowed the economy to grow a lot more and still get inflation back in the bottle.”

Inflation is on track to continue to cool. That doesn’t mean prices will go back to where they were in 2019, though they may decline in some areas. If the labor market stays robust, wages should keep rising, too, and at a pace faster than inflation.

“Wage growth for all income groups is stronger than the rate of inflation, so people’s real purchasing power should improve. They should feel a lot better about the buying power of their income a year from now than they do today,” Zandi said. The relief will be most welcome for low-income households, he added, which are under the most pressure right now.

Even though the Fed hasn’t cut interest rates yet, they’ve started to fall in some areas in anticipation of what’s ahead. Mortgage rates are back under 7 percent, which has inspired some hopefulness around the housing market. The stock market is feeling excited about the year ahead — arguably, maybe a little too excited.

After the Fed’s latest interest rate decision and Fed Chair Jay Powell’s news conference, “markets got a little giddy,” Sahm said. In the subsequent days, some Fed members tried to temper some of that giddiness, to limited effect, as investors remain pretty amped.

This nice little story has to come with some buts

Nothing is guaranteed in life, and certainly not a good economy. Even if the US avoids recession in 2024, someday, there will almost certainly be a recession. It’s just the way the business cycle goes. There are plenty of risks that could put a recession on next year’s agenda.

Some economists still think a downturn is likelier than not. Andrew Patterson, senior international economist at Vanguard, has a base case that the US and other developed markets will see mild recessions likely in 2024. Even if the US economy doesn’t turn completely negative, he anticipates some job loss. “Fed policy [needs to] bring inflation fully back down to 2 percent, and we believe that is going to require some labor market loosening,” he said. “That’s going to come with some pain.”

Larry Summers, former treasury secretary and one of the pre-2023 doomsayers, told the Financial Times that it’s “premature” to call this a soft landing, given where inflation is. “We may soft land on the aircraft carrier, but the landing may be hard, and we may overfly,” he said.

The main risk for 2024 is the Fed. It might keep interest rates too high for too long, pushing the economy under, or it could cut them too early, allowing inflation to take off again and necessitating even harsher hikes later. It could confuse markets with its decisions. “They’re threading a difficult needle,” Zandi said. “I think the odds of a mistake are certainly receding, but we’re not across the finish line.”

“Definitely by this time next year, we’re either landed, or we’re in a recession”

There could be dangers lurking elsewhere that observers don’t see yet, such as an issue in the banking system. Silicon Valley Bank’s collapse earlier this year, which was related to the Fed’s interest rate hikes, felt like it came out of nowhere, even though it didn’t. If the past few years have taught us anything, the economy can also take big hits from really uncontrollable forces, like the pandemic and Russia’s Ukraine war. A sudden change in oil prices is always a possible risk, too. “Nothing does more damage to the economy than higher oil prices very quickly,” Zandi said.

There is also the fact that inflation coming back down without a recession would be a unique scenario. For inflation to come down fully to 2 percent while maintaining a strong labor market and avoiding broader macroeconomic weakness would be quite unprecedented, Patterson said. “It’s not out of the realm of possibility,” he added. “It’s not our base case by any means. But it is also something that we’re keeping an eye on.”

Honestly, maybe we just kind of need a hopeful nice story sometimes

The US economy is far from perfect. Increases in the cost of living are painful, and even before this latest bout of inflation, things were far from great. Higher interest rates to fight inflation have made things worse. There’s no denying that people say they do not feel good about the state of affairs, macroeconomically speaking, even if their spending says otherwise, and many admit that, personally, they’re doing okay. We’re in a weird and far-from-ideal economic scenario.

Still, it might be nice to at least try to be modestly optimistic. If objectively good things keep happening for long enough, maybe people will start to feel it more, too.

In 2023, we sort of turned a corner on inflation. Turning that corner took too long, but it happened, nonetheless. “I understand why people are angry. I’m just happy that more people have paychecks, the paychecks are bigger, and they’re out there spending,” Sahm said. She thinks that by the middle of next year, we should know whether we’ve gotten a soft landing or not. “Definitely by this time next year, we’re either landed, or we’re in a recession,” she said. Let’s all aim for the former.

By: Emily Stewart
Title: It’s okay to be optimistic about the economy next year
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Published Date: Tue, 26 Dec 2023 12:00:00 +0000

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I'm a writer for lifestyle publications, and when I'm not crafting stories, you'll find me cherishing moments with my family, including my lovely daughter. My heart also belongs to my pets—Sushi, Snowy, Belle, and Pepper. Besides writing, I enjoy watching movies and exploring new places through travel.