As we bid adieu to the year, it’s time to reflect on the economic ups and downs. The US economy, once seen as a long shot for a soft landing, has surprised us all. The Federal Reserve, too, was taken aback, as they had to repeatedly upgrade their forecasts for the economy, inflation, and interest rates.
Meanwhile, Europe and China have been struggling to meet expectations. China’s response? A boost in deficit-funded infrastructure spending.
Despite a global cooling of inflation and a halt in tightening monetary policy, the effects of past interest rate hikes are still rippling through business and consumer behaviors.
The first half of next year is expected to be the low point for global growth in this cycle. But it’s also when we might see central banks start to cut rates or at least talk about it. The pace of economic recovery in the second half of the year will hinge on the confidence of central banks to fully normalize interest rates. But don’t hold your breath – we don’t expect this to happen until 2025.
Fed Chair Jay Powell must be patting himself on the back. Inflation has moved very close to the Fed’s target with little economic cost. The labor market has stayed close to full employment. Strong productivity growth has helped cool growth in unit labor costs in recent quarters, dampening the inflationary impulse.
The US economy is on track to beat last year’s growth of 1.9% with a 2.4% pace, despite a forecast to slow to 1.5% in 2024. The biggest tailwind is the continued impact of past fiscal policy, which has played a key role in keeping the US economy humming in the face of high inflation and interest rate increases.
Looking ahead to next year, weaker consumer spending will be a key ingredient in slower US growth. We are already seeing consumers look a bit more cautious in the fourth quarter, and delinquency rates for credit cards and auto loans have risen above pre-pandemic levels despite a very low unemployment rate.
With Washington in a stalemate and likely to remain funded under continuing resolutions until the election, the fiscal impulse is likely to peter out, weighing on government’s contribution to growth. The one area of the economy which is likely to see its fortunes improve is housing, where lower borrowing costs are expected to bolster activity in the second half of the year.
Slower growth next year should create better balance in the labor market. Cooler wage growth is needed to get inflation all the way back to 2%, and the next stage of the disinflation process is expected to be a bit slower. So, buckle up folks, it’s going to be a bumpy landing.