CHICAGO — Although indicators pointed to a recession in 2023, the U.S. economy has grown during this year.
“Part of that is because we got great supply chain improvements and part is because we had really strong balance sheets for households, businesses and farms across the board,” said Anna Paulson, executive vice president and director of research at the Federal Reserve Bank of Chicago.
“We had good growth even though we had a banking crisis, auto strikes and geopolitical risks,” said Paulson during a presentation at the Midwest Agriculture Conference, “Who Owns Midwest Farmland? And Why?” hosted by the Federal Reserve Bank of Chicago.
“So, despite the external shocks which might have thrown the economy into a recession, we really powered through and during the third quarter we had 5% growth, which we haven’t had for a long time,” she said.
A year ago, Paulson said, things were looking gloomy because interest rates had gone up a lot over a short period of time, housing starts were slowing and consumer confidence was low.
“All these things are associated with slowing economic trends,” the executive said.
“In December 2022, the Blue Chip consensus outlook for this year was we were going to get 0.3% growth, but instead so far we’ve been growing at a 3 percentage point annual rate,” she said. “The unemployment rate is at 3.9%, which is historically low.”
In addition, inflation has come down during 2023.
“That’s a weird combination of factors to have strong growth, strong labor market and inflation go down,” Paulson said. “The way you get inflation to come down and the economy do well is because there’s more supply, more people are in the labor market and more stuff is getting to where it needs to go.”
Now, she said, there are people who are worried about a recession in 2024.
“People are expecting 2024 to look like what they expected 2023 to look like with a GDP growth at 0.8%,” she said. “That’s below what we think the potential is, but a little better than what they thought 2023 would be.”
There is an expectation of falling inflation.
“But this time inflation will be coming down not because of supply improvements, but because demand is slowing,” Paulson said. “One piece that underlies that perspective on the economy is the monetary policy is tightened a lot, so it’s starting to put a dent on activity.”
The labor market remains strong.
“I think this going to be an important part of what we actually see happen because 70% of the U.S. economy is consumption,” Paulson said. “If people have jobs and wages are going up they have money to spend and that’s going to keep the economy strong.”
The question is if the labor market will remain strong throughout 2024.
“Employers get antsy about if there will be demand for their product or should they cut costs and a big part of costs are labor,” Paulson said.
It is also important to remember that people had a lot of excess savings accumulated during the pandemic.
“There was nowhere to spend your money and the fiscal policy put a lot of money in people’s pockets and the same thing happened for businesses and farmers,” she said. “So, people got their balance sheets into a good shape and invested for the future when rates were low and they had extra cash.”
However, Paulson said, now that extra cash has been spent.
“We think the excess savings is about tapped out, so that’s not a source of underlying strength we would expect to see boosting demand as we go through 2024,” she said.
It is now more expensive to buy a car if a person needs to finance that purchase, farm operating loans have a higher interest rate and mortgage rates have increased.
“That tends to slow down investment because the project that priced out to be profitable at 4% interest rates is not profitable at 8% interest rates,” the executive said. “So, we’re going to delay that project and that’s a factor that could slow investment.”
For 2024, Paulson said, the current forecast suggests below-trend growth, a little increase in unemployment and inflation continuing to go down.
“I don’t think you can expect the supply chain improvements to continue forever, but we’ve been surprised,” she said.
“I think we’re starting to see the higher rates affect decisions by businesses, households and farmers to reevaluate their spending plans, but on the other hand, the labor market is still strong and the economy has proved to be resilient.”
Another factor that can impact the economy is external shocks.
“The thing about external shocks is they’re impossible to forecast, but they have a huge implication when they happen,” the executive said. “We’ve got wars in two parts of the world that are really important for energy production and that’s a risk out there that could really change our economy.”
The monetary policy is going to be focused on inflation, Paulson said.
“The market is expecting interest rates to come down a little bit as we go through 2024 and 2025,” she said. “That’s consistent with the idea that inflation gets back down to 2% and the economy slows to deliver that inflation path.”
