(CNN) — Many feared that 2023 would be a year of recession. It turned out to be a year of remarkable resilience.
The US economy appears to be experiencing a soft landing that many consider almost impossible.
Inflation has cooled sharply, unemployment remains low and the Federal Reserve could deliver rate cuts as early as March.
“The big story of 2023 is that we've stopped landing,” Justin Wolfers, a professor at the University of Michigan, told CNN.
Wolfers noted that not only did the economy recover from the fastest recession in history, but it also overcame the war in Ukraine, oil price shocks, political dysfunction and many other problems.
“It's the little machine that can do it,” Wolfers said of the economy. “As bad as the shocks were, this could have been much worse.”
The US economy still faces real risks and challenges, from the war between Israel and Hamas to the lowest-priced housing market in a generation. Still, there are solid reasons to be optimistic about the economy in 2024, forces that are easier to see than a year ago.
A “significant” cooling of inflation
Wall Street and many in Washington expect inflation to ease after hitting a four-decade peak in June 2022.
But few expected how quickly it would happen. Consumer prices rose 3.1% year-on-year in November, down from 9.1% in June 2022.
The pace of inflation cooling is “significant,” economist Ian Shepherdson wrote in a recent report.
Mark Jandy, chief economist at Moody's Analytics, told CNN he expects inflation to reach the Federal Reserve's 2% target by the end of 2024.
After topping $5 a gallon in 2022, gasoline prices fell significantly in 2023. GasBuddy projects 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 cooled so much that the Federal Reserve has halted rate hikes, which would have rattled the economy and spooked investors.
Federal Reserve officials are now planning rate cuts through 2024, which would herald victory in the war on inflation.
U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference at Federal Reserve headquarters in Washington on December 13, 2023. (Win McNamee/Getty Images)
Zandi said he doubts the Federal Reserve will cut rates four times in 2024, starting in May. Goldman Sachs is betting that the Federal Reserve could start cutting interest rates in March.
The rate cuts will bring relief to the high street, reducing the cost of getting a mortgage, car loan and carrying credit card balances. Mortgage rates have already fallen from 8% in October to 6.6% by the end of the year.
A very successful year for stocks
Cooling inflation, fading recession fears and rate cuts lifted Wall Street.
US stocks took a hit as the S&P 500 rallied for nine weeks to end the year – 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 an 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 reflected optimism about the economy, inflation and hope for a soft landing, which is good news for Wall Street and Main Street.
“Abnormally low” layoffs
Despite Federal Reserve interest rate hikes, the unemployment rate is just 3.7%, near the lowest level in half a century.
Initial jobless claims, an indicator of layoffs, are historically low: just 218,000, a sign that many employers are reluctant to lay off their existing workers.
“The applications are very limited,” Jandi said. “Apps need to approach 300,000 to sound the alarm. “We're a long way from that.”
If this trend continues, it should support consumer spending, a key driver of the US economy.
“As long as layoffs are relatively low, the economy should be fine,” Jandy said. “We're in this kind of virtuous economic circle.”
Students attend the Cape Fear Community College Business and Information Technology Career Fair in Castle Hayne, North Carolina. (Alison Joyce/Bloomberg/Getty Images)
Pay over price
During much of the Covid-19 economic recovery, prices rose faster than wages, meaning real wages, adjusted for inflation.
However, this trend has recently started to change, and salaries are approaching inflation.
Both Jandy and Wolfers are optimistic that real wage growth will pick up in 2024.
“Over time, when inflation is low, earnings will increase and outpace inflation,” Jandy said. “People will start to feel better about things.”
“A million things” can go wrong
Of course, recent years have reminded us how unexpected events like the Covid-19 pandemic or the Russian invasion of Ukraine can destroy even the most optimistic forecasts.
Other black swans may emerge to cast a shadow over the economic outlook for 2024.
“As we know, a million things can go wrong,” Wolfers said. “Recessions happen.”
Zandi said the risk of further stress on the financial system, such as bank failures in early 2023, tops his list of concerns.
Another concern that won't let Jandy sleep: the 2024 presidential election.
The race for the White House will certainly be affected by the economy (which is a major issue for voters). But the opposite can also happen.
Jandi predicted a very close contest and warned that a disputed election could lead to uncertainty or social unrest.
“If so, it will have a huge impact on the stock market and the economy in general,” he said.
However, Wolfers expects normal levels after a tough few years for the US economy.
“Every economist's secret dream is that we expect the economy to be boring,” he said. . “It's not the story because of the pandemic, but it could be the story next year.”
