February 21, 2024 7:45 am
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Economic lookahead: As we ring in 2024, can the US economy continue to avoid a recession?

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D. Brian BlankMississippi State University

Brandy HadleyAppalachian State University

With economic forecasters rewriting their 2024 outlooks following recent moves from the Federal Reserve, The Conversation turned to two financial economists to share their thoughts on the upcoming year.

D. Brian Blank and Brandy Hadley are professors who study finance, firm financial decisions and the economy. They explain what they’re watching in 2024.

1. At this time last year, many experts saw a downturn on the horizon. Will that long-predicted recession finally come to pass in 2024?

The good news is, probably not.

The U.S. economy is not in a recession and will likely continue growing. Over the past year, gross domestic product has outpaced expectationsinflation is trending downward and employment remains robustReal wages have increased, as has consumer spending. Additionally, housing demand is strong and financial markets are at all-time highs. While no one should argue that there will never be another recession, 2024 seems to be an unlikely time for one – unless there’s some unexpected spark like, for example, a new global pandemic.

To be fair, optimism leads to risk-taking, which can always contribute to the next downturn. And the U.S. economy faces plenty of challenges, including already elevated debt costsa possible government shutdown, rising consumer debt and continued distress in commercial real estate, which could result in rolling industry downturns. Other headwinds include the national debtother nations’ weaker economies and ongoing global conflict and trade tensions.

While 2023 has seemed to many people like a “soft landing” – that elusive achievement in which policymakers reduce inflation without sparking a downturn – prior recessions have followed periods where people thought they had been avoided. That may be why bankers, finance leaders and economists are still noting the risks of interest rates remaining high.

Still, the fundamentals are strong and may be on the riseif you believe chief financial officers. Plus, despite dysfunction in Washington, recent laws and policies like the CHIPS and Science Act, the bipartisan infrastructure deal, the AI Bill of Rights and the Executive Order on Safe, Secure, and Trustworthy Use of Artificial Intelligence could further boost economic growth by stimulating job creation and enhancing competitiveness. Notably, public and private manufacturing and industrial investment are at unprecedented levels, and technology is quickly advancing, further contributing to the positive economic outlook, not to mention strong consumer balance sheets.

Jay Powell, wearing a suit, gestures toward an unseen crowd during a press conference. He stands behind a podium and in front of a line of flags.
U.S. Federal Reserve Chair Jerome Powell speaks to the media on Dec. 13, 2023. The Fed left interest rates unchanged in December as inflation continued to cool, signaling a potentially dovish turn. Photo by Liu Jie/Xinhua via Getty Images

2. Then what about a ‘vibecession’? Are we in one now, and why does it matter for 2024?

When you look at the economic pessimism revealed in polls and on social media, a fascinating paradox emerges – despite the collective bad vibes, the majority of Americans say their personal economic situations are basically fine.

The writer Kyla Scanlon has called this state of affairs a “vibecession”: While the economy continues to grow, the vibes are just off. The fact that consumer spending continues to see sustained growth, despite the gloomy economic outlook, underscores a curious split between sentiment and economic activity.

3. What if individual income and spending keep rising? Wouldn’t that be enough to end the vibecession?

In short: Not necessarily.

While inflation has been high over the past couple of years – reaching a peak of 9.1% in June 2022 before falling to 3.1% recently – most Americans have not seen their income rise as fast as inflation since 2021. As a result, many are frustrated that they can’t afford what they could in 2020. Is reminiscing like prior generations about how Coca-Cola used to cost a nickel killing the vibes? If inflation rises faster than wages in 2024, the vibes may suffer.

What’s more, other positive economic developments have seemed to barely affect the vibes. Just about everyone who wants a job has one, which is a crucial factor in maintaining consumer confidence and spending habits.

To be sure, gas prices also play an outsized role in shaping sentiment, and as they unexpectedly fell in December, sentiment improved. This highlights the impact of energy costs on the public’s mood and suggests that fluctuations in gas prices can quickly influence overall economic sentiment.

However, we suspect that consumers will keep doing what they’re doing – spending money and feeling bad about the economy – until some shock forces them out of it. This weird contradiction between perceived gloom and personal financial well-being highlights the complex interplay of psychological factors and material realities that shapes the overall economic narrative.

4. Could the vibecession become a self-fulfilling prophecy?

Consumers say they feel bad, but they’re continuing to spend more than expected, which has been the case for more than a year now. These facts seem at odds with each other, and some experts worry the pessimism itself could hurt the economy. This is because people spend less when they’re concerned about the future.

However, this has been the case for months – so it’s unclear why it should change now.

While understanding that consumer sentiment is complex, we think it makes more sense to focus on what people do, not what they say. And people are behaving in a way that’s consistent with a strong economy due to rising real income, not to mention a robust labor market.

And overall, if you tell people for the better part of two years that a recession is imminent, you shouldn’t be shocked that they’re gloomy. If the consensus is wrong, it should surprise no one when sentiment diverges from economic data – especially with politicians blaming each other for a weaker economy.

5. What else are you watching for in 2024?

Coming off the December Federal Reserve meetingmany forecasters have rewritten their 2024 outlooks with the expectation that the Fed will lower rates more than they anticipated before Chair Jerome Powell gave an optimistic press conference. Though many expected Powell to minimize discussions about lowering rates, meeting responses were strong, deeming inflation defeated and consensus expectations forecasting a benchmark federal funds rate below 4% by year end to relax financial conditions.

Federal reserve policymakers see falling rates in the future.
An infographic shows the Federal Reserve’s dot plot, which charts policymakers’ forecasts for the federal funds rate. Omar Zaghloul/Anadolu via Getty Images

While investors appear to have overreacted – again – additional slowing in inflation and economic growth is likely as the economy continues to normalize post-pandemic. The most likely outcome for 2024 is that the Federal Open Market Committee lowers rates following more downward revisions to inflation data beginning as early as March until rates end the year just below the Fed’s 4.5% federal funds rate projection. However, the Fed isn’t waiting for inflation to reach its 2% target before lowering rates, which means that rapidly falling inflation could make more rate cuts possible.

Economic growth is likely to remain strong in 2024, and inflation will likely slow, albeit at a more muted rate. And with mortgage rates falling below 7% now, housing starts and mortgage originations are rising. Now, housing affordability may improve in the coming year, albeit from the worst level in decades.

While 2024 is likely to involve debates in other areas, hopefully fewer of these economic conversations will happen in 2024 than in 2023. And if we are lucky, markets will rise at least as quickly, though we should remember that almost everyone was wrong last year – and if there’s one prediction we can make with confidence, it’s that at least some of today’s forecasts will look pretty silly in retrospect.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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