Analysis: Slower and lower with flashbacks

A year ago, economic prospects were dominated by fears of an imminent recession.

The year was full of surprises: no recession, depressed consumers hanging out at the mall, weakening housing activity with rising home prices, failure of a few high-profile banks, 5.2 percent Q3 growth, volatile interest rates and drone-filled skies over two wars. The hard-landing/soft-landing alternatives have remained in play, but recent data and opinion have moved toward the soft-landing scenario: slower growth accompanied by lower inflation, but no recession.

The interplay between pandemic induced spending shifts, supply disruptions, and war, accompanied by federal income support programs, created a supply demand imbalance. Inflation reached 9.1 percent in mid-2022. This was a shock to a generation that grew up with the low inflation rates of recent decades and a bad dream to those who remember the 70s and early 80s. Supply chains got fixed, the Fed reacted by shrinking its balance sheet and 11 rate increases. Inflation has moderated to 3.1% year over year in the November CPI. Still above the target, but on a downward trend.

November and December have seen dramatic moves in financial markets as prospects for a soft landing increased. There is growing sentiment that the Fed has finished increasing rates and is nearing the time for rate reductions. In its December 13 th release the Fed indicated the possibility of additional firming, but Fed projections on the same day had rates being lowered in 2024. Markets soared, but the Fed has not yet declared victory as it should not.

Employment has continued to increase with a 199,000 net gain in November and a 3.7 percent unemployment rate. The fraction of the population in the labor force continues to increase towards pre-pandemic levels. The most recent Job Growth Update has 48 states with year over year job gains with Idaho ranked number one. The labor market has softened some with the number of job openings declining in October to 8.7 million from 9.4 million in September with about 1.4 openings per unemployed person. Wage growth rates have moderated, and the Beige Book indicates easing conditions in labor markets across the nation. With the subsiding of inflation real wages are growing again.

Moving into 2024, the best theme might be “slower and lower” for growth, inflation, and interest rates. The tightening of policy has lags such as repricing of loans and projects that no longer pass muster with much higher interest rates. The stockpile of pandemic savings has been depleted and inventories normalized. Assuming that the progress towards lower inflation remains intact, short term interest rates will start down in 2024.

The outlook is benign with GDP growth moving below two percent and core inflation moving below three percent. The risks are weighted to the downside due to the uncertain lags. Major policy issues abound in an election year which means they will not be addressed. Deficit and debt questions are back once again with a deficit of $1.7 trillion in fiscal 2023 and a sharply growing interest burden. In mid-2020 the ten-year Treasury yielded .66 percent on Halloween this year it was 4.88 percent. (Do the math!) Interest costs of the Federal Debt have been soaring up 33 percent in Fiscal 2023 almost matching defense. Another ratings agency downgraded US Debt as both parties whistle past the warnings.

This Christmas season we have major wars in Europe and the Middle East and a challenge in the far Pacific. It is reminiscent of the 1940s. (I read about it.) We confront this with a deteriorated military supply chain and a divided body politic much like the 1939-40 period. It is a Churchillian moment without a Churchill and presents economic demands on a US economy at or near capacity. It is a guns or butter episode so beloved in economics textbooks.

The coming year is likely to be filled with more surprises against a background of moderating growth, diminishing inflation and lower rates.

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Press contributor John W. Mitchell was a professor of economics at Boise State University for 13 years before joining U.S. Bancorp in 1983. He was chief economist of U.S. Bancorp until July 1998 and served as economist, Western Region, for US Bank until July 2007. A resident of Coeur d'Alene, Mitchell has been making economic presentations regarding the nation and the region for nearly 50 years.