Inflation cools rapidly, paving the way for economic confidence in 2024

As the year 2023 drew to a close, many had anticipated it would be marked by economic turmoil and recession fears. However, it defied expectations and emerged as a year of remarkable resilience for the U.S. economy. The United States now finds itself on a trajectory that few believed possible, enjoying what appears to be a soft landing. Inflation has undergone a dramatic cooling, unemployment rates remain low, and there is even speculation of rate cuts by the Federal Reserve as early as March.

Inflation cools rapidly, paving the way for economic confidence in 2024

Justin Wolfers, a professor at the University of Michigan, encapsulated the sentiment, describing the year 2023 as a testament to the economy “sticking the landing.” This achievement is all the more remarkable considering it came on the heels of the fastest recession in history, alongside challenges like the conflict in Ukraine, oil price shocks, political turbulence, and numerous other issues. “The economy is akin to the little engine that could,” Wolfers remarked.

“Given the severity of the shocks it faced, the outcome could have been far worse.” Though the U.S. economy is not without its risks and obstacles, including the Israel-Hamas conflict and a housing market characterized as the least affordable in a generation, there are tangible reasons for optimism in 2024, reasons that are more discernible than they were a year ago.

1. Notable Cooling of Inflation
While many on Wall Street and in Washington had expected inflation to moderate after reaching four-decade highs in June 2022, the pace at which it did so took even experts by surprise. Consumer prices, which had surged by 9.1% in June 2022, saw a substantial slowdown, with a year-over-year increase of just 3.1% in November.

Economist Ian Shepherdson aptly labeled this rapid decline in inflation as “remarkable.” Mark Zandi, the chief economist at Moody’s Analytics, expressed confidence that inflation will approach the Federal Reserve’s 2% target by the close of 2024. Gas prices, which had soared above $5 per gallon in 2022, also experienced significant relief in 2023, with projections suggesting further declines in 2024. This trend is expected to save consumers a substantial $32 billion on fuel compared to the previous year.

2. Victory Declared over Inflation
Inflation has cooled to such an extent that the Federal Reserve has put a halt to the massive rate hikes that had raised concerns about the economy’s stability and unnerved investors. In an unexpected turn of events, Fed officials are now considering rate cuts for 2024, effectively signaling victory in the battle against inflation.

Mark Zandi predicts that the Fed will reduce rates four times in 2024, likely commencing in May, while Goldman Sachs is betting on rate cuts starting as early as March. Such rate cuts would provide relief to Main Street, lowering the costs associated with mortgages, car loans, and credit card balances. Already, mortgage rates have plummeted from nearly 8% in October to 6.6% at the end of the year.

3. A Blockbuster Year for Stocks
The confluence of cooling inflation, receding recession fears, and the prospect of rate cuts injected fresh enthusiasm into Wall Street. U.S. stocks closed out the year with a flourish, as the S&P 500 embarked on a nine-week winning streak, marking the longest such streak since 2004. Meanwhile, the Nasdaq surged by 43%, coming tantalizingly close to its best performance in two decades. While it is acknowledged that the stock market does not directly mirror the broader economy, in this instance, the rally largely reflects optimism about the economy, inflation, and confidence in a soft landing – good news for both Wall Street and Main Street.

4. Unusually Low Layoffs
Despite the Federal Reserve’s previous rate hikes, the unemployment rate currently stands at just 3.7%, nearing a half-century low. Initial jobless claims, a proxy for layoffs, remain historically low at 218,000, indicating that many employers are reluctant to part with their workforce.

Mark Zandi emphasized the extraordinariness of this situation, stating, “For alarm bells to go off, claims would have to be closer to 300,000. We are a long, long way away from that.” If this trend persists, it is expected to bolster consumer spending, a pivotal driver of the U.S. economy.

5. Paychecks Overtake Prices
Throughout much of the post-Covid-19 economic recovery, prices had outpaced wage growth, resulting in real wages (adjusted for inflation) shrinking. However, recent trends indicate a shift, with paychecks beginning to catch up with inflation. Both Mark Zandi and Justin Wolfers are optimistic that real wage growth will gain momentum in 2024. As inflation remains low, incomes are expected to outpace and surpass inflation levels, ultimately leading to improved economic sentiment.

While the outlook for 2024 appears promising, the past few years have demonstrated how unexpected developments, such as the Covid-19 pandemic or Russia’s invasion of Ukraine, can disrupt even the most optimistic forecasts. Numerous factors, including further financial stress and the 2024 presidential election, could potentially cloud the economic picture.

As economists and experts cautiously navigate these uncertainties, they hope for a return to normalcy after a tumultuous period for the U.S. economy. The aspiration is for a 2024 marked by stability, where concerns dwindle, and citizens feel secure about their income and the state of the nation. In summary, the year ahead holds promise, but economists remain watchful, knowing that unforeseen events can reshape the economic landscape.