Weekly Report – January 3rd, 2024

Graph 2024.01.03

Highlight of the Week

The Recession That Never Came

At the beginning of 2023, the outlook for the US economy was gloomy – inflation levels had reached 6.5%, the Federal Reserve had hiked interest rates seven times in 2022, and borrowing costs were skyrocketing. Economists and policymakers alike were warning that these pressures would likely cause increased unemployment and decreased output. In October 2022, Bloomberg Economics projected the odds of a recession in 2023 to be 100%.

However, the US economy defied these predictions and exceeded expectations in several areas. Unemployment has remained at historically low levels, and the annual 2.8% growth in real GDP is better than expected. All the while, inflation has declined to 3.1%.

Economists attribute the predictive miss to a few different factors:

  • Economic models failed to consider the unprecedented nature of COVID and the resulting $5 trillion fiscal stimulus. The excess savings in consumer pockets allowed consumer spending to consistently beat expectations in 2023.
  • Productivity continued to rise as new technologies emerged and the supply chain finally resolved many pandemic-era disruptions and shortages. The increased supply helped cool inflationary pressures and support GDP growth.
  • The labor market remained resilient as the sectors hit hardest during the pandemic, including leisure and hospitality, continued to recover in 2023 and contributed to surprise gains in the labor market. Additionally, a surprising number of people came off the sidelines to rejoin the workforce last year.

Economists are now adjusting models and making forecasts for 2024. Hopeful for a soft-landing scenario, more than three-fourths of economists believe the chance of a recession in the next 12 months is less than 50%, according to a December survey from the National Association for Business Economics.  Perhaps this projection will be fulfilled in 2024; however, only time will tell.

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