Retail sales rose 0.3% in November as the US heads into the holiday season and people continue to spend.
Americans increased their spending from October to November as the unofficial holiday season began. Retail sales rose 0.3%, according to the Commerce Department. Economists had expected a decline of 0.2%. Numbers are not adjusted for inflation. (December 14) (AP Video: Joseph B. Frederick)
The post-COVID-19 economy was supposed to finally stop defying gravity and slip into recession this year.
Instead, the stock market increasingly believes the Federal Reserve is on track to rein in inflation without triggering a recession, a rare feat known as a “soft landing.”
To be sure, growth is expected to slow due to the Fed’s slow pace of aggressive rate hikes, the depletion of excess household savings due to the pandemic, and reduced federal spending.
But forecasters said other factors, including near-record home prices and stock prices, further easing of inflation at or near the Fed’s 2% target, and the central bank’s tentative plans to cut interest rates more significantly than previously We predict that it is likely to keep the economy afloat. It was expected.
“2023 was a very good year,” said Mark Zandi, chief economist at Moody’s Analytics. “2024 is going to be a really good year.”
Will the Fed lower interest rates in 2024?
A series of developments in recent weeks have brightened the outlook. The Fed has said it is likely finished raising interest rates to combat inflation and plans three cuts in 2024 as a strategy to lower borrowing costs for consumers and businesses. Inflation has slowed more dramatically than expected, demonstrating the Fed’s change in direction.
And the stock market, which was already soaring as inflation conditions improved, soared after the Fed’s change in policy.
“It was like pouring gasoline on an already burning fire,” Scott Anderson, BMO’s chief U.S. economist, said in a note to clients.
What will the economy look like in 2024?
Forecasters expect the economy to grow 1.3% this year, lower than the 2.4% expected in 2023 as of July, according to a Wolters Kluwer Blue Chip Economic Indicators survey. This is higher than the company’s forecast of 0.7%. Forecasters say the modest gains in the first half of this year will be replaced by increased production by the fall due to further cuts in Fed interest rates.
The unemployment rate is 3.7%, slightly above the lowest level in 50 years, but is expected to rise to 4.2% by the end of 2024, well below the 4.8% forecast by economists a year ago. .
Note that the Wolters-Kluwer poll was conducted in early December, prior to the December 13th Fed news.
Some top economists have since revised their forecasts. Richard Moody, chief economist at Regions Financial, raised his forecast for gross domestic product (GDP) growth to 1.9% from 1.6%. Zandi said he always believed inflation would recede and the Fed would change its stance, and he is sticking to his own forecast of 1.8%.
GDP growth of just under 2% is far from robust, but it would be close to the 2% average of the decent decade before the pandemic. A significant drop in inflation would require the economy to cool down dramatically, because soft consumer and business demand typically prompts companies to cut prices and employees to accept small raises.
However, nothing is normal in the post-pandemic economy, with economic growth reaching 5.8% in 2021 after emerging from the COVID-19 recession. This boom was accompanied by shortages of products and workers, and soaring prices. However, even without a significant decline in demand, these supply-driven problems have been resolved and inflation is now easing. Paul Ashworth, an economist at Capital Economics, called the development “nearly unprecedented.”
What are the biggest economic threats?
There are risks.
Inflation may fall more slowly than expected, and the Fed will need to keep its key policy rate high for a longer period of time. That could hurt growth and even send the country into recession or “stagflation,” a toxic combination of economic weakness and high inflation, Ashworth said. The impact of the Fed’s delayed rate hike of 5.25 percentage points from early 2022 would be the largest in 40 years and could weigh on the economy more than expected.
Additionally, disruptions to global shipping due to the military conflict in the Red Sea could push prices further higher.
But it’s also possible that inflation falls more quickly and the Fed cuts rates more quickly to keep inflation-adjusted interest rates from rising, Goldman Sachs says. Futures markets predict six quarterly interest rate cuts in 2024, twice as many as the Fed expected.
“We believe the upside and downside risks are balanced,” Regions’ Moody said. “Previously, we thought downside risks were dominant.”
In other words, the economy is just as likely to rise again as it is to be in the doldrums.
How different parts of the economy are likely to behave in 2024:
consumer spending
American shoppers have done more than enough to sustain an economy that is primarily supported by their purchases. But the pent-up demand from the pandemic is dissipating, Moody said, and the savings gained from federal stimulus checks and staying home are dwindling, especially for low- and moderate-income consumers.
Gregory Daco, chief economist at EY Parthenon, said these households are racking up record credit card debt to cope with high prices and are holding back on spending even as banks tighten lending standards. It is said that there is
Meanwhile, Daco said job and wage growth will likely slow as the economy cools, leaving consumers with less cash to spend. High interest rates should also keep spending in check, at least until the Fed starts cutting rates.
However, there are some bright spots.
Average annual wage growth is expected to fall from 4% toward the Fed’s 3.5% target, but inflation is likely to fall even faster, Zandi said. That should further increase the purchasing power of households, he says.
And recent strong growth in productivity, or output per worker, could allow employers to continue giving healthy raises without hurting profits, Zandi said.
Low- and middle-income Americans are under pressure, Zandi said, while higher-income consumers have saved more from the pandemic and are benefiting from near-record home prices and stock prices. They are encouraged to splurge because they feel richer. Zandi said the top third of income earners account for nearly two-thirds of overall spending, while the bottom third account for one-tenth.
What is the conclusion?
Consumer spending is expected to increase by 1.4% in 2024, after growing 2.2% last year, according to Wolters Kluwer research. Zandi is predicting a big 2% rise.
increase in employment
Zandi said average monthly employment growth will fall from an expected 216,000 in 2023 to just 53,000 this year due to slowing consumer spending and a cooling economy.
Moody’s and Goldman Sachs are more optimistic, predicting average monthly additions of about 100,000 jobs, enough to prevent the unemployment rate from rising by 3.7%.
Zandi agrees that employment growth could be even faster if immigration does not decline as much as expected and remains strong. This would allow labor supply and employment to continue to grow, while keeping wage growth and inflation in check.
Some hot industries are expected to hire large numbers of workers this year.
Point in Time Studios, a video production company specializing in virtual reality and 3D animation, expects sales to increase 75%, thanks in part to the artificial intelligence craze, company president Rami Kara said. . The Tempe, Ariz.-based company plans to add up to 10 employees to 25, he said.
Healthy Technology Solutions Inc., which provides computer systems and services to hospitals and high-end construction companies, also plans to add four to five people to its 12-person workforce, said Leo Bretnitzky, president of the Las Vegas-based company. says Mr.
“At a time when all the[big]tech companies were cutting jobs, it gave[job seekers]more access to talent,” he says.
But after surging in 2021, sales have been declining for the past two years, said Robert Brill, CEO of Los Angeles-based digital advertising firm Brill Media. Rising borrowing costs are making many companies wary of taking on new projects, he said.
“I think companies are becoming more frugal,” Brill said, adding that he expects that to change if the Fed lowers interest rates. There are currently no plans to increase the number of staff by 20.
inflation
Morgan Stanley expects the Fed’s recommended core inflation rate, which strips out volatile food and energy items, to fall to 2.4% by year-end from 3.2% in November and a high of 7% in mid-2022. There is. Ashworth expects the rate to approach the Fed’s 2% target by the middle of this year, and officials will begin lowering rates in March.
But Morgan Stanley expects rent increases, the biggest driver of inflation, to decline more slowly, inflation to remain high longer and the Fed’s first interest rate cut to be delayed until June.
government spending
The Biden administration’s sweeping bill to boost development of U.S. infrastructure, green energy and computer chips has pumped billions of dollars into the economy. But spending cuts are expected in 2024 as part of Congress’ November deal to avoid a government shutdown.
Zandi expects non-defense spending to decline by 4%, following a 4.8% increase in 2023.
business investment
Economists say high interest rates will likely curb business investment in the first half of 2024, but lower Fed rates could spark a rebound in the second half of the year.
Broadly speaking, companies will continue to invest in equipment and structures as long as consumers continue to buy their products and services, Zandi said.
He expects business investment to increase, but at less than half the pace of 4.4% in 2023.
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housing
Single-family housing starts slumped last year, largely because mortgage rates approached 8%.
However, interest rates have recently fallen below 7%. Demand for new homes is also strong as existing homeowners are reluctant to sell because they would have to buy another home at much higher mortgage rates.
Gus Faucher, chief economist at PNC Financial Services Group, said housing should boost economic growth in 2024 after hurting economic growth last year.