BY DR. MICHAEL L. WALDEN, PH.D. William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University
Events have been pointing to 2024 being a transition year for economic policy. The past three years have dealt with Covid and the aftermath of Covid. In 2020 and 2021, the priority was to first contain and then eliminate Covid as a danger impacting the economy. The federal government pumped trillions of dollars into the pockets of households, businesses, and institutions in an effort to sustain them during the pandemic.
A complementary policy came from the nation’s central bank, the Federal Reserve, or “Fed.” The Fed used its powers to push interest rates lower and to increase the amount of money in circulation. Both moves had the goal of increasing consumer spending and thereby motivating businesses to hire workers.
These policies were largely successful. The economy came roaring back in late 2020 and 2021, sending the unemployment rate from 14% in early 2020 to near 4% by late 2021. Indeed, the economy was so strong that a new problem emerged — labor shortages.
But an even bigger problem emerged that was not expected, a rapid jump in price inflation. For almost thirty years, inflation had been a non-issue. The all-item annual inflation rate ranged between 1% and 3%. Yet in 2021 and 2022, the inflation rate continually marched higher, peaking at a year-over-year rate of more than 9% in the summer of 2022. Since worker earnings were not rising as fast, the surge in inflation meant falling standards of living for most households.
Consequently, in 2022 the Fed reversed its policy. It shifted from fighting unemployment to fighting inflation. In less than a year, the Fed increased its key interest rate from effectively 0% to over 5%. In the background, the Fed also began pulling money out of the economy.
The Fed’s intent was to slow the pace of economic growth, thereby taking pressure off prices. As the Fed’s policies began to take effect, and as the broken supply chains began to be healed, the inflation rate moderated, falling to under 4% at the end of 2023.
When the Fed attempts to slow the pace of the economy, the fear is always that slow growth will first turn into no growth, and ultimately become negative growth, meaning a recession. Indeed, this happens more times than not.
Yet, a recession did not occur in 2023. Through the first three quarters of the year, the economy continued to grow. Importantly, jobs were added, and consumer spending expanded.
The positive path of the economy in 2023 has sparked hopes that, rather than a recession, the economy will glide to a “soft landing.” This means the economy will continue to grow, albeit more slowly, resulting in an on-going downward trend in the inflation rate. Stated another way, a soft landing means the Fed will reach its target annual inflation rate of 2%, but without inducing a recession.
Recent data suggest a soft landing could be emerging. Jobs are being added, but at a slower pace, and consumers continue to spend more, but the monthly increases have become milder.
It would be a major accomplishment by the Fed to engineer a soft landing. One indication the Fed believes a soft landing is coming is that the Fed has not raised its key interest rate since May.
With this background, what can be expected in 2024? If the economy continues to modestly grow in early 2024, and if the inflation rate continues to slowly decline, then by the middle of 2024 the Fed could be in a position to begin reducing interest rates. Given this scenario, I wouldn’t be surprised to see the Fed reduce their benchmark interest rate by two percentage points in the second half of 2024. I would also expect the all-item annual inflation rate to come very close to 2% by the end of 2024.
Therefore, I see the strong possibility for two distinct and different economies in 2024. In the first half, interest rates will not be cut, the economy will slow, and there may even be some months where job growth stops, and the unemployment rate rises. But I don’t see enough of an economic retreat to qualify as a recession.
The second half of 2024 will be upbeat. Falling interest rates will help many sectors — including real estate and manufacturing — experience faster growth. This will mean more economic development projects in the Raleigh, Wake County, and Greater Triangle regions will be “jump-started.”
At this point in the economic cycle, the Federal Reserve is in the driver’s seat. The Fed missed the signals pointing to a burst in price inflation. If the Fed can corral inflation without the aftermath of a recession, then they may be forgiven.
And regarding Raleigh, Wake County, and the Triangle, despite the aforementioned macroeconomic challenges in 2024, the “beat will go on” in the region. I expect the local economy will be bigger, better, and stronger when the curtain falls on 2024.
Walden is a Reynolds Distinguished Professor Emeritus at North Carolina State University and President of Walden Economic Consulting, LLC. He served on the NCSU faculty for 43 years. He is the author of 14 books and 330 articles, and he has made over 3,300 personal appearances. Among Walden’s awards are the UNC Board of Governors Award for Excellence in Public Service, the Holladay Award for Excellence at N.C. State University, and the Order of the Long Leaf Pine.