5 reasons to be optimistic about the economy of 2024

(CNN) — Many people feared that 2023 would be a recession year. It proved to be a year of remarkable resilience.

The US economy appears to be enjoying the soft landing that many thought almost impossible.

Inflation has declined sharply, unemployment remains low, and the Federal Reserve may cut rates as early as March.

“The big story of 2023 is that we stuck the landing,” University of Michigan professor Justin Wolfers told CNN.

Wolfers said the economy not only recovered from the sharpest recession in history, but also overcame the war in Ukraine, oil price shocks, political dysfunction and many other problems.

“This is the little engine that can do it,” Wolfers said of the economy. “Considering how bad the injuries were, it could have been much worse.”

The US economy still faces real risks and challenges, from the war between Israel and Hamas to the lowest affordable housing market in a generation. And yet, there are solid reasons to be optimistic about the economy in 2024, forces that are easier to see than a year ago.

“Remarkable” cooling of inflation

Many on Wall Street and in Washington had expected inflation to ease after hitting a four-decade high in June 2022.

But few people anticipated how quickly it would happen. Consumer prices rose 3.1% year-on-year in November, significantly down from 9.1% in June 2022.

Economist Ian Shepherdson wrote in a recent report that the pace of inflation falling is “remarkable”.

Mark Zandi, chief economist at Moody’s Analytics, told CNN he expects inflation to approach the Federal Reserve’s 2% target by the end of 2024.

After reaching $5 per gallon in 2022, gasoline prices fell significantly in 2023. GasBuddy estimates that average annual US gasoline prices will fall again in 2024, leading to consumers spending US$32 billion less on fuel than in 2023.

victory over inflation

Inflation has fallen so low that the Federal Reserve has stopped raising rates, threatening to derail the economy and spook investors.

Federal Reserve officials now also plan to hold off on rate cuts until 2024, an outcome that would represent a declaration of victory in the war on inflation.

Zandi said he doubts the Federal Reserve will cut rates four times in 2024, possibly starting in May. Goldman Sachs believes the Federal Reserve could start cutting rates in March.

The rate cut will provide relief to Main Street, reducing the costs of obtaining mortgages, car loans and carrying credit card balances. Mortgage rates have already fallen from about 8% in October to 6.6% by the end of the year.

Very successful year for stocks

Wall Street was boosted by low inflation, reduced recession fears and fears of rate cuts.

US stocks ended the year with a bang, as the S&P 500 ended the year with a nine-week rally – its longest winning streak since 2004. The Nasdaq rose 43%, narrowly missing its best year in two decades.

It is true that the stock market is not the economy. Sometimes what’s good for Wall Street isn’t good for Main Street, and vice versa.

But in this case, the stock market rally largely reflected optimism about the economy, inflation and confidence of the soft landing, which is good news for Wall Street and Main Street.

“exceptionally low” layoffs

Despite the Federal Reserve raising rates, the unemployment rate is only 3.7%, near its lowest level in half a century.

Initial jobless claims, an indicator of layoffs, is at a historically low: just 218,000, a sign that many employers are reluctant to lay off the workers they have.

“Applications are exceptionally low,” Zandi said. “To sound the alarm, applications would have to reach 300,000. “We’re very, very far away from that.”

If this trend continues, it should support consumer spending, the main driver of the US economy.

“As long as layoffs remain relatively low, the economy should be fine,” Zandi said. “We’re in such a good economic rut.”

wages above prices

During the COVID-19 economic recovery, prices rose faster than payrolls, meaning real wages, adjusted for inflation, declined.

However, recently the trend has begun to change and wages are approaching inflation.

Both Zandi and Wolfers expect real wage growth to pick up pace in 2024.

“As time goes on here and inflation remains low, incomes will grow and outpace inflation,” Zandi said. “People will start feeling better about things.”

“A million things” could go wrong

Of course, recent years have reminded us all how unexpected events like the COVID-19 pandemic or the Russian invasion of Ukraine can ruin the most optimistic forecasts.

Other black swans may emerge to cast a shadow over the economic outlook for 2024.

“As we know, there are a million things that can go wrong,” Wolfers said. “Recessions happen.”

Zandi said the risk of further strains on the financial system, such as bank failures as early as 2023, tops his list of concerns.

Another worry that doesn’t let Zandi sleep: the 2024 presidential election.

The race for the White House will certainly be influenced by the economy (it is the main issue for voters). But the opposite can also happen.

Zandi predicted a very close race and warned that a disputed election could lead to uncertainty or even social unrest.

“If that’s the case, it could be very damaging for the stock market and the economy in general,” he said.

Still, Wolfers is hopeful for a return to normalcy after a tough few years for the U.S. economy.

“Every economist’s secret dream is that we expect the economy to be boring. He said, “I want a 2024 in which you never want to call me because most of your audience has jobs, they feel comfortable with their incomes and nothing bad has happened.” “That hasn’t been the story because of the pandemic, but it could be the story next year.”