5 reasons to be optimistic about the 2024 economy

(CNN) — Many feared that 2023 would be a recession year. It turned out to be a year of amazing resilience.

The American economy appears to be experiencing a soft landing that many thought was almost impossible.

Inflation has fallen sharply, unemployment remains low, and the Federal Reserve could cut rates as soon as March.

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

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

“This is a small engine that can do this,” Wolfers said of the economy. “Given how bad the concussions were, it could have been a lot worse.”

The American economy still faces real risks and challenges, from the war between Israel and Hamas to the least affordable housing market in a generation. Still, there are good reasons to be optimistic about the economy in 2024, strengths that are easier to see than a year ago.

“Noticeable” cooling of inflation

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

But few imagined how quickly this would happen. Consumer prices rose 3.1% year over year in November, down significantly from 9.1% in June 2022.

The rate at which inflation is cooling is “astonishing,” economist Ian Shepherdson wrote in a recent report.

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

After topping $5 per gallon in 2022, gas prices have dropped significantly in 2023. GasBuddy predicts that average annual U.S. gasoline prices will fall again in 2024, allowing consumers to spend $32 billion less on fuel than in 2023.

Victory over inflation

Inflation has dropped so much that the Federal Reserve has suspended rate hikes that threatened to undermine the economy and spook investors.

Federal Reserve officials are now even planning to cut rates by 2024, a result that would signal victory in the war on inflation.

Zandi said he suspects the Federal Reserve will cut rates four times in 2024, likely starting in May. Goldman Sachs is betting that the Federal Reserve could begin cutting rates in March.

Lower rates will bring relief to Main Street by lowering the costs of getting a mortgage, taking out a car loan and maintaining a credit card balance. Mortgage rates have already fallen from nearly 8% in October to 6.6% by the end of the year.

A very successful year for stocks

Cooling inflation, fading recession fears and looming rate cuts supported Wall Street.

US stocks ended the year with a bang, with the S&P 500 rising nine weeks into the year, its longest winning streak since 2004. The Nasdaq soared 43%, narrowly missing its best year in two decades.

It’s 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 in a soft landing, which is good news for Wall Street and Main Street.

‘Extremely low’ layoffs

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

Initial jobless claims, a measure of layoffs, remained historically low at just 218,000, a sign that many employers are reluctant to lay off their workers.

“The number of applications is extremely low,” Zandi said. “The number of applications would have to approach 300,000 for the alarm to sound. “We are very, very far 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 will be fine,” Zandi said. “We’re in such a virtuous economic circle.”

Wages are higher than prices

For much of the Covid-19 economic recovery, prices rose faster than jobs, meaning inflation-adjusted real wages fell.

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

Both Zandi and Wolfers expressed optimism that real wage growth will pick up in 2024.

“Over time, as inflation remains low, earnings will catch up and outpace inflation,” Zandi said. “People will start to feel better about things.”

“A Million Things” Could Go Wrong

Of course, recent years have reminded us all how unexpected events such as the Covid-19 pandemic or Russia’s invasion of Ukraine can ruin the most optimistic forecasts.

There may be other black swans that will cast a shadow on 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 strain on the financial system, such as bank failures in early 2023, tops his list of concerns.

Another worry keeping Zandi awake: the 2024 presidential election.

The race for the White House will likely be influenced by the economy (a major 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 this is the case, it could cause a lot of damage to the stock market and the economy as a whole,” he said.

Still, Wolfers is hopeful for some normalcy after several difficult years for the U.S. economy.

“Every economist’s secret dream is that we expect economics to be boring. “I want you to never want to call me in 2024 because most of your viewers have jobs, are comfortable with their income and nothing bad has happened,” he said. “Because of the pandemic, that didn’t happen, but it could happen next year.”