What prospects await the US economy in 2024? Can another recession be avoided?

As economic forecasts for 2024 are revised following recent actions by the Federal Reserve, The Conversation asked two financial economists to share their thoughts on the year ahead.

Brian Blank and Brandi Hadley are professors studying financial decisions and business economics. They explain what to expect in 2024.

The good news is that probably not.

The US economy is not in recession and will likely continue to grow. Over the past year, gross domestic product has exceeded expectations, inflation is trending downward, and employment remains strong.

While no one should argue that another recession won’t happen, 2024 seems unlikely for one to occur unless something unexpected happens, like another global pandemic. Frankly, optimism leads to risk, which could always contribute to the next recession.

The U.S. economy faces numerous challenges, including already high debt costs, a potential government shutdown, rising consumer debt and an ongoing commercial real estate crisis that could lead to a further slowdown in the sector.

Other headwinds include government debt, weak economies in other countries, and ongoing global trade conflicts and tensions.

While 2023 was seen by many as a “soft landing”—that elusive achievement by which policymakers reduce inflation without triggering a recession—previous recessions have occurred after people thought they had been avoided. This may be why bankers, financial officials and economists continue to warn about the risks of continuing high interest rates.

Additionally, despite the dysfunction in Washington, recent laws and policies such as CHIPS and the Science Act, the bipartisan infrastructure deal, and the AI ​​Bill of Rights and Secure Use can further stimulate economic growth by spurring job creation and increased competitiveness. .

In particular, public and private investment in the manufacturing and industrial sectors is at unprecedented levels, and technology is advancing rapidly, further contributing to the positive economic outlook, not to mention the strength of consumer balance sheets.

When you look at the economic pessimism revealed by polls and social media, a surprising paradox emerges: Despite the poor collective perception, most Americans say their personal economic situation is generally good.

Writer Kayla Scanlon dubbed this condition “vibecession,” a portmanteau of vibes (vibrations in Spanish) and recession (recession in Spanish), that is, when the economy continues to grow but the perceptions or vibrations are not positive. It is “a general pessimism about the economy, regardless of the economy itself.”

The fact that consumer spending continues to rise steadily despite the gloomy economic outlook highlights a curious disconnect between sentiment and economic activity.

In short: not necessarily.
While inflation has been high over the past two years—it peaked at 9.1% in June 2022 and then fell to 3.1% more recently—most Americans haven’t seen their incomes rise as quickly. like inflation, from 2021.

As a result, many are disappointed that they cannot afford what they could in 2020. Memories of how Coca-Cola used to cost a nickel influence optimism or perceptions of the economy. If inflation rises faster than wages in 2024, this could affect perceptions.

Moreover, other positive economic events appear to have had little impact on people’s perceptions. Almost everyone who wants a job has one, which is a critical factor in maintaining consumer confidence and spending habits.

Gasoline prices certainly also play a role in people’s perceptions, and the unexpected drop in December has added to the sense of optimism.

This highlights the impact of energy costs on public sentiment and suggests that fluctuations in gas prices can quickly affect overall economic sentiment.

However, we suspect that consumers will continue to do what they are doing – spending money and feeling bad about the economy – until some shock causes them to stop.

This strange tension between perceived pessimism and personal financial well-being highlights the complex interplay of psychological factors and material reality that shapes the overall economic picture.

Consumers say they’re feeling under the weather but continue to spend more than they expected, and have been doing so for more than a year. These facts seem contradictory, and some experts worry that pessimism itself could harm the economy. This happens because people spend less when they are worried about the future.

However, this has been the case for several months, so it is unclear why this should change now.

While we understand that consumer sentiment is complex, we believe it makes sense to focus on what people do rather than what they say. And people’s behavior is consistent with a strong economy due to rising real incomes, not to mention a robust labor market.

And anyway, if you’ve been telling people for the better part of two years that a recession is inevitable, don’t be surprised if they become pessimistic. If the consensus is wrong, no one should be surprised if sentiment diverges from economic data, especially when politicians blame each other for the weakening economy.

After the Fed’s December meeting, many analysts rewrote their forecasts for 2024, expecting the Fed to cut rates more than expected.

While many expected Jerome Powell, the Fed president, to minimize discussions about rate cuts, the response at the meeting was strong given that inflation had been beaten and projected that the benchmark federal funds rate would be below 4% by the end of the year to ease financial stability. conditions.

While investors appear to have overreacted again, a further slowdown in inflation and economic growth is likely as the economy continues to normalize from the pandemic.

However, the Fed is not waiting for inflation to reach its 2% target before cutting rates, meaning a rapid decline in inflation could make further rate cuts possible.

Economic growth is likely to remain strong in 2024 and inflation will slow, albeit at a more moderate pace. Housing affordability could now improve next year, albeit from its worst level in decades.

While debates in other areas are likely to take place in 2024, we can expect to see fewer such economic conversations in 2024 than in 2023. And if we’re lucky, markets will rise at least as fast, although we must 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 the current predictions will look pretty stupid in retrospect.