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EAST LANSING, Mich. – Although the economy has improved since the COVID-19 pandemic, inflation has been a challenge for many Americans throughout 2023 and the economy remains a top issue ahead of the 2024 election. Experts are already making predictions about interest rates, inflation and the market for next year.
Antonio Doblas Madrid is an associate professor in the Department of Economics in Michigan State University’s College of Social Science. He reflects on the economy this past year and answers questions about what you can anticipate about the economy in 2024.
What are a few of the most memorable economic events of 2023?
The economy in 2023 reminds me of Rocky Balboa, the boxer with a strong chin from the Rocky films who, despite getting hit over and over, keeps moving forward.
A year ago, the consensus prediction among investors and professional forecasters was slower growth and higher unemployment. Inflation was still above 6%, the Federal Reserve increased interest rates to one of the highest rates in 40 years, and the stock market ended 2022 in the red. Many observers said a ‘soft landing’ was a pipe dream and a recession inevitable.
The year 2023 brought its own set of challenges. To name a few, a debt ceiling standoff started in January and continued until May, bringing the government dizzyingly close to default and causing a ratings downgrade. In March, the failure of Silicon Valley Bank started a crisis that, had it not been contained by a historic expansion of deposit guarantees, would have spread through the system and taken down the economy. A war broke out in Gaza. A large-scale auto workers strike temporarily shut down large parts of the sector. And the economy of China, a major trading partner, decelerated.
Given all this, it is remarkable how good the numbers look right now. Inflation has steadily fallen to around 3% and is now within striking distance of the 2% target. The most recent gross domestic product, or GDP, report shows a robust 3% year-on-year growth rate, the unemployment rate remains at 3.7%, and the stock market has made a roaring comeback. The numbers look stronger than those of other major advanced economies, such as the eurozone, the United Kingdom, Japan or Canada.
However, it is too early for a victory parade. The fight against inflation is not over, monetary policy has long and variable lags and, even in a strong economy, many people are struggling. But, thus far, it is hard to imagine a softer landing than 2023.
What’s expected to happen with the economy in 2024?
With the usual caveat that even the best predictions have a margin of error, professional forecasters see the economy still growing in 2024, albeit more slowly. The numbers hover around 1.5% for real GDP growth and 4% for the rate of unemployment. This paints a picture of moderate growth, and a labor market that, while no longer crushing records, is still within the range of what can be called full employment.
What’s predicted to happen with inflation?
Forecasters and market-based measures of expectations both predict that inflation is likely to continue falling gradually in 2024, to about 2.5%. Thus, the inflation shock that hit the economy is expected to continue fading, although it may take some time to go that last mile from 3% to 2%. The Fed also appears to be quite optimistic on inflation, given its latest forward guidance.
What will happen with interest rates in the new year?
The Fed expects inflation to fall quickly, so quickly, in fact, that it has started to reverse the hawkish policy of the last two years in its forward guidance. This means that, although the Fed has not lowered interest rates yet, it has started talking about the possibility of rate cuts — three of them — in 2024. With the economy still at full employment, this clearly means that the Fed is expecting inflation to continue to fall.
How could the presidential election affect the economy?
There is a popular belief that election uncertainty is detrimental to the economy, but we do not really see that in the GDP data. Growth rates in presidential election years are not lower than average. On average over the last few decades, there is a small negative effect on the stock market in election years, but it disappears in the 12 months following the election, regardless of which party is elected.
What economic words of wisdom can you share for 2024?
It seems to me that the perception of the economy is worse than the reality. So, I would recommend stepping away from the noise and looking at the data for some objective measures.
As far as saving for retirement goes, I think mainstream financial advice is solid. So, listen to your financial advisor if you have one. If you don’t, that’s okay, it is not that hard. There are many free tools, like retirement calculators, to help you figure out how much to set aside monthly.
Take advantage of employer-provided and tax incentives. Invest mostly in stocks when young, gradually switching to fixed income as you age. For equities, follow a passive strategy. Buy and hold index funds. Do not try to pick stocks or time the market. If you are at the fixed-income stage, you may want to open a high-interest CD to lock in a high rate before the Fed starts cutting rates again.
Finally, set up your contributions automatically draw, stop thinking about money for a few months and invest instead in nonfinancial assets, like relationships and health.
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