The U.S. economy averted disaster in 2023, achieving a major cooldown of inflation while steering clear of a recession.
Policymakers overcame stiff odds to glide the economy toward a “soft landing,” but their task isn’t finished. They aim to slow inflation further at risk of causing a downturn that could trigger mass layoffs.
Still, a sunny outlook prevails among economists. Experts widely expect the U.S. economy to slow but not shrink over the next year. That outcome would allow inflation to near normal levels while the country sustains economic growth.
“The hard part is over,” declared a Goldman Sachs report last month.
Potential pitfalls abound, however. The Federal Reserve now forecasts interest rate cuts next year that could ease borrowing and boost spending, but such moves threaten to trigger a rebound of inflation.
Many of the world’s largest countries are set to hold elections next year, including the U.S. A shift in economic policy in one or more key nations could introduce uncertainty and rattle global markets.
As if hedging its bets, that same Goldman Sachs report warns of “higher-than-normal risks to our overall economic outlook.”
Despite a gloomy perception of the economy among many Americans, a slew of positive signals marked U.S. performance in recent months.
Inflation continued to fall from a peak of about 9% last summer, reaching within a percentage point of the Fed’s target rate. While hiring slowed lately, it remained robust.
All the while, economic growth surged. The U.S. economy grew at an annualized pace of 4.9% over three months ending in September, more than doubling growth in the previous quarter, a government report in October showed.
The progress on inflation prompted a landmark announcement from the Fed earlier this month: Plans to reverse its near-historic rate hikes with a series of cuts next year.
Rate cuts would ease the burden on borrowers, allowing consumers to make smaller credit card payments and businesses to invest in projects at lower costs. In theory, such a policy could unleash a burst of spending that boosts the economy.
Jean Hatzius, chief economist at Goldman Sachs, described the possibility of rate cuts at central banks worldwide, including the U.S., as an “important insurance policy against a recession.”
Other economists, however, caution that rate cuts carry their own perils.
Federal Reserve Board Chair Jerome Powell answers a question during a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, D.C., Nov. 1, 2023.
Kevin Lamarque/Reuters, FILE
In a report last month, Morgan Stanley characterized potential rate cuts as a “Goldilocks dilemma” for central banks, which risk a recession if they keep rates too high but threaten a rebound of inflation if they move rates too low. A potential burst of spending, after all, could hike demand and raise prices once again.
Due in part to that dilemma, Morgan Stanley expects interest rates to fall but remain fairly high, leading to slow growth. That growth prediction holds for a slew of other prominent forecasters: J.P. Morgan, the International Monetary Fund and The Organization for Economic Cooperation and Development, or OECD.
Another major uncertainty next year stems from a raft of elections in nations that play host to some of the world’s largest economies.
In the spring, voters in India go to the polls in an election that will determine the country’s next prime minister; and in June, Mexico will choose its president. The U.S. will do the same a few months later.
“A busy electoral calendar will create policy uncertainty,” S&P Global said last week in its 2024 economic forecast, citing “important elections taking place across an unusually large number of countries.”
Speaking at a press conference in Washington, D.C. earlier this month, Fed Chair Jerome Powell cautioned that the course of the economy remains unclear.
“Inflation has eased from its highs and this has come without the significant increase in unemployment. That’s very good news,” Powell said.
“But inflation is too high, ongoing progress in bringing it down is not assured, and the path is uncertain,” he added.