2024 forecast, falling inflation, labor market cooling

A new year is always a good time to consider how the economy might perform. And many of us economists were wrong about expecting a recession in 2023. It never came to pass, but we had good reason to expect it.

Mainly, the Federal Reserve increased the federal funds target rate from essentially zero at the beginning of 2022 to over 5% by mid-2023. Such a rapid increase in rates would slow down consumer spending on durable goods, housing, and business spending on capital expenditures.

The rapid increase in short-term rates inverted the yield curve. Specifically, the yield on a three-month Treasury bill has been lower than on a 10-year note since mid-2022. This phenomenon, which is known as an inverted yield curve, has preceded every recession by a year or so since 1956.

So far, a recession has not materialized. Growth has been fueled, in part, by consumers who make up about two thirds of the economy. A recent San Francisco Federal Reserve Bank report considered the impact of consumer spending and savings trends pre and post pandemic on excess savings. It concluded that consumers, in aggregate, have enough savings from COVID-era federal stimulus programs to last until sometime in the first half of 2024 if draw-downs occur as they have in the past few months.

Fourth quarter GDP won't be released until Jan. 25. If it increases at a 1.7% annualized pace as predicted, then real GDP for 2023 would grow 2.5%.

Despite the moderate growth in 2023, clouds are on the horizon. Nonfarm employment growth has slowed from an average monthly gain of 312,00 during the first half of 2023 to an average 165,000 in the fourth quarter. In a sign that the labor market is cooling, average annual wages rose 4.1% from a year ago in December—down from 5.9% in March 2022. While falling inflation may contribute to the wage decline, other indicators support the idea that the labor market is weakening.

Job postings are a good indicator to watch. They are updated daily and are a leading indicator of employment trends because businesses don't post job ads unless they expect demand for their goods and services to continue to increase.

Chmura's Real Time Intelligence job postings shows a decline in active postings in the United States, Virginia, and the Richmond metro area over the past year.

The percent of job postings in the United States fell double digits during the week of Dec. 25, 2023 when compared with a year ago. Job postings during the week of Dec. 25, 2023 relative to last year were stronger in Virginia compared to the United States and Richmond.

The slowing quits rate is another sign that the labor market is easing. According to the Job Openings and Labor Turnover Survey (JOLTS) report compiled by the Bureau of Labor Statistics, the quits rate stood at 2.2% of total employment in November 2023 which translates into 3.5 million workers—a rate much lower than the record 3.0% in April 2022 but much higher than the low of 1.5% of total employment in April 2020 that occurred during the 'great resignation' phase of the pandemic.

Aside from the easing labor market, the repayment of student loans, increasing commercial real estate delinquencies, rising consumer credit card debt, and declining business investment all point toward the possibility that the economy will see further deterioration as the year progresses.