It has been a very interesting and confusing year. We were told to expect a recession, but it seems we spent ourselves out of it. Prices rose, and fell, and rose and fell. Interest rates climbed, then settled out and seem to be falling again now. AND consumers keep spending.
Next year's political season is likely to cause some heartache and a lot of consternation (from all sorts of people, institutions and markets) but election season tends to have little impact on our economy. Likewise, despite our world seeming more perilous with wars in Ukraine and the Middle East, as well as fighting in Africa, our economy remains strong (thanks to our spending habits).
2024 will be another unprecedented year for our world, our nation, our state and our region.
That said, here's what's happening:
From the Financial Times: S&P 500 ends strong year just shy of record with 24% annual gain.
The US stock market has recorded its strongest annual performance in two years following a blistering rally in recent months, as investors bet major central banks have finished raising interest rates and will cut them rapidly next year.
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Inflation: From the New York Times: A closely watched measure of inflation cooled notably in November, good news for the Federal Reserve as officials move toward the next phase in their fight against rapid price increases and a positive for the White House as voters see relief from rising costs.
The Personal Consumption Expenditures inflation measure, which the Fed cites when it says it aims for 2 percent inflation on average over time, climbed 2.6 percent in the year through November. That was down from 2.9 percent the previous month, and was less than what economists had forecast. Compared with the previous month, prices overall even fell slightly for the first time in years.
That decline — a 0.1 percent drop, and the first negative reading since April 2020 — came as gas prices dropped. After volatile food and fuel prices were stripped out for a clearer look at underlying price pressures, inflation climbed modestly on a monthly basis and 3.2 percent over the year. That was down from 3.4 percent previously.
While that is still faster than the Fed’s goal, the report provided the latest evidence that price increases are swiftly slowing back toward the central bank’s target. After more than two years of rapid inflation that has burdened American shoppers and bedeviled policymakers, several months of solid progress have helped to convince policymakers that they may be turning a corner.
Increasingly, officials and economists think that they may be within sight of a soft economic landing — one in which inflation moderates back to normal without a painful recession. Fed policymakers held interest rates steady at their meeting this month, signaled that they might well be done raising interest rates and suggested that they could even cut borrowing costs three times next year.
Be Careful What You Wish for California State Legislators: (from USA Today) California Pizza Huts lay off all delivery drivers ahead of minimum wage increase-The layoffs come as fast-food workers in California are set to get a pay bump of close to 30% in April as the minimum wages rises from $16 to $20 an hour.
Pizza Hut is laying off more than 1,200 delivery drivers in California.
The layoffs, which will take place through the end of February, come as California's minimum wage is about to go up by $4. Fast-food workers in the state are set to get a pay bump of close to 30% in April as the minimum wages rises from $16 to $20 an hour.
PacPizza, LLC, operating as Pizza Hut, said in a Worker Adjustment and Retraining Notification (WARN) Act notice that the company made a business decision to eliminate first-party delivery services and, as a result, the elimination of all delivery driver positions, according to Business Insider. The notice was filed with the state's Employment Development Department.
The Worker Adjustment and Retraining Notification Act requires employers to give notice of mass layoffs or plant closures.
Southern California Pizza Co., a second Pizza Hut franchise, is also eliminating its in-house delivery services and laying off 841 drivers, according to a WARN Act notice from Dec 1.
The layoffs impact drivers at Pizza Hut locations in Sacramento, Palm Springs, Los Angeles and other cities throughout the state.
Customers must use third-party apps like DoorDash, GrubHub and Uber Eats for food deliveries at the affected chain restaurants.
AND: (from Calmatters): Minimum wage hike for California health workers will cost billions. Workers say they need it.
a law Gov. Gavin Newsom signed last month that creates a higher minimum wage for health care workers. The measure, which gradually raises the industry minimum wage to $25 an hour, had support from both unions and the lobbying group that represents California hospitals. But lawmakers passed the bill — and Newsom signed it — without a cost estimate.
The costs are beginning to come into focus now that the Newsom administration is releasing projections for how the wage hike could drive up the price of providing health care to Californians for government agencies. That figure, at least $4 billion with about $2 billion from the state’s general fund and another $2 billion from the federal government, does not include anticipated pay increases for public employees.
The unions and lawmakers who advocated for the wage increase say it is necessary to improve the lives of overworked health care workers. Union representatives say many workers have quit their jobs, leaving health care systems understaffed and exacerbating conditions for other employees.
The new cost estimates are unsurprising to Republican lawmakers who opposed the wage increase. Democratic lawmakers passed the measure despite the state’s projected $31 billion budget deficit.
and From (Bloomberg): California Deficit Casts Shadow Over Health-Care Worker Pay Law-A major labor union says California budget officials are overstating the likely cost of a new law raising the minimum wage for more than 400,000 health-care workers across the state.
Gov. Gavin Newsom (D) has pledged to work with legislative leaders to change the measure (S.B. 525) as the state faces a $68 billion budget deficit, casting uncertainty over plans to phase in higher minimum pay in hospitals, nursing homes and other medical facilities.
But the president of the SEIU-United Healthcare Workers West, which backed the law, argues the actual cost will be lower than the $2 billion in additional general fund spending for next fiscal year that Newsom’s administration has projected.
The governor’s push to change the law reveals a central point of tension in California’s capitol, where labor unions scored several major victories over the last year, though their allies in the legislature’s Democratic supermajorities now face a mounting budgetary crisis.
When lawmakers reconvene in Sacramento on Jan. 3, they are likely to hunt for potential savings—including from the very labor unions that have so effectively flexed their muscle in recent years.
Interest Rates: From the LA Times: Buying a home? Mortgage rates are falling- By Andrew Khouri. Mortgage rates fell for the eighth consecutive week, giving cash-strapped home buyers some relief as the new year approaches. The average interest rate on the popular 30-year fixed mortgage clocked in at 6.67% for the week that ended Wednesday, down from 6.95% a week earlier, according to data released Thursday by mortgage giant Freddie Mac. As recently as late October, rates were 7.79% — the highest in more than two decades.
The drop in borrowing cost saves new buyers hundreds of dollars each month, but experts said consumers shouldn’t expect a drastic improvement in 2024.
The interest rate on mortgages changes based on a variety of factors, including inflation expectations and Federal Reserve policy.
Rates have fallen since October, however, in large part because multiple economic reports have signaled that inflation is slowing. The most recent decline comes after the Federal Reserve signaled last week that it may be done raising its benchmark interest rate, which helps set a floor on all types of borrowing costs, including mortgage rates.
For prospective homeowners, housing remains drastically more expensive than when rates were 3% and below that during the early part of the pandemic. But the decline to 6.67% from 7.79% equals $486 in monthly savings for a $800,000 home, assuming a buyer puts 20% down.
What effect somewhat lower mortgage rates will have on the housing market depends on how buyers and sellers react.
When mortgage rates first surged in 2022, home prices fell in response as buyers quickly pulled away and inventory swelled. But prices started rising again this year as well-heeled first-time buyers returned and existing homeowners increasingly chose not to sell, unwilling to give up their rock-bottom mortgage rates on loans taken out before or during the pandemic.
In most counties, home prices are near their all-time peaks, while in Orange County, prices are setting new records, according to data from Zillow.
A recent forecast from Zillow predicted values would be flat to down slightly in Southern California from last month to November 2024.
Zillow senior economist Nicole Bachaud said falling rates could mean home price growth comes in stronger than that forecast, but maybe not.
“Given the affordability crisis in Los Angeles, we might see sellers move before buyers have enough room in their budgets to respond,” she said.
From the Financial Times: UK inflation falls to 3.9% in November-UK inflation slowed more than expected in November to 3.9 per cent, down from 4.6 per cent the previous month, according to figures that will intensify pressure on the Bank of England to start cutting rates in 2024.
AND FOR 2024?
From S&P Global Market intelligence: Top 10 economic predictions for 2024. Contributor: Ken Wattret
1. Inflation will moderate further.
The sharp initial decline in global consumer price inflation from late 2022 stalled in mid-2023, reflecting a rebound in energy prices and sticky core inflation, particularly for services. The downward trend has resumed and is expected to continue through 2024. S&P Global Market Intelligence analysts forecast annual global consumer price inflation at 4.7% in 2024, down from an estimated 5.6% in 2023 and a peak of 7.6% in 2022. Lower consumer price inflation rates in 2024 compared with 2023 are forecast across most regions.
2. Growth in North America and Western Europe will fall short of its potential.
This is consistent with the goal of bringing inflation back to target rates. Weaker annual real GDP growth rates are forecast across all the largest regions in 2024 compared with 2023. Global annual real GDP is forecast to grow at a slower pace in 2024 - 2.3% compared with an estimated 2.7% in 2023 - although strength in some regions including Asia Pacific will help to avert a global hard landing.
3. Mainland China's economy will recover slowly.
Mainland China's economy will be supported by more accommodative policy, a gradual improvement of private-sector confidence, and an expected bottoming out of the housing market downturn. We forecast annual real GDP growth in mainland China of 4.7% in 2024, down from an expected 5.4% in 2023.
4. Policy rates will be cut in advanced economies from mid-year.
With confidence building that consumer price inflation rates will fall back to target, monetary policy pivots are predicted by mid-2024. Rate cuts will begin once concerns about underlying price pressures have abated. Quantitative Tightening (QT) by the world's major central banks will continue.
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5. Emerging markets will get an earlier start on easing cycles.
The central banks that are already easing generally tightened their monetary policies relatively early, keeping inflation expectations stable and second-round effects in check. In Latin America, for example, inflation rates have fallen relatively rapidly, while labor market conditions are generally not tight. Easing cycles that are already under way in Chile, Brazil and Peru are forecast to continue in the period ahead, with rate cuts also forecast in Mexico in the first half of 2024.
6. The US dollar will depreciate.
The depreciation will be reinforced by a relative slowing of both US real economic growth and inflation as well as the overhang of a current-account deficit which, as a share of US GDP, is unsustainably high. The yen is expected to appreciate against the US dollar more strongly than many of its peers during 2024, in tandem with the forecast divergence of monetary policy.
7. Financial headwinds to growth will persist.
We expect the lagged impact of higher interest rates and the quickly waning effect of COVID-19-related support measures to weigh more heavily on debt servicing capacity in 2024. That is likely to drive NPLs higher in most regions. Banks will likely maintain a more cautious stance to lending as a result, requiring higher collateral, and restricting credit to lower quality borrowers. Credit growth is expected to come in below trend in most countries, dampening growth.
8. Declines in residential house prices in Western Europe have further to go.
Tight credit conditions and rising borrowing costs will continue to drive prices down in 2024. The speed and intensity of the correction among economies varies, depending on the imbalances accumulated in the last decade in each housing market as well as mortgage rate fixation periods.
9. A busy electoral calendar will create policy uncertainty.
Geopolitical factors will remain an important source of risk and uncertainty surrounding our economic forecasts, potentially aggravated by important elections taking place across an unusually large number of countries. Election campaigns will set the policy agenda across several important emerging economies, including India and Indonesia in the spring and Mexico in midyear, with elections to the European Parliament also scheduled in June. Uncertainty about the outcome of the US election, along with the policy implications, will likely be a hindrance to economic prospects.
10. The energy transition will support growth in the US and Canada.
US fiscal policy has turned somewhat stimulative again as the incremental funding in the Infrastructure Investment and Jobs Act begins to support actual construction, as Inflation Reduction Act subsidies for green energy projects supports a huge rise in construction of electrical manufacturing and related facilities, and as the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act similarly boosts production of US fabrication plants. These policy initiatives are one of various factors leaning against a US recession. In Canada, climate initiatives have already been in place in Alberta and Saskatchewan with the existence of eight operational carbon capture facilities. New, similar projects are in the planning stages or under construction.
From The Conference Board Economic Forecast for the US Economy: After several years of pandemic-induced turbulence the US economy appears to be coming in for a landing at last. Inflation is moderating, interest rates are elevated but stable, labor market conditions are cooling, and consumer spending appears to be decelerating. The question remains, however, what kind of landing awaits?
In recent months the prospects for a soft landing have risen, but we continue to believe that bumps await the economy in early 2024. We forecast two quarters of negative growth that will be broadly felt across the economy. The contraction will be limited in depth and duration, but we expect the National Bureau of Economic Research (NBER) to formerly classify it as a recession at some point in the future.*
Our 2024 US economic outlook is associated with numerous factors, including elevated inflation, high interest rates, dissipating pandemic savings, rising consumer debt, and the resumption of mandatory student loan repayments. While we forecast that real GDP will grow by 2.4% in 2023, we expect it to slow to 0.9% in 2024. However, following this downturn the US economy should begin to normalize. We forecast 2025 GDP growth to come in near potential at 1.7%.
US consumer spending has held up remarkably well this year despite elevated inflation and higher interest rates. However, this trend cannot hold, in our view. Real disposable personal income growth has struggled to grow, pandemic savings are dwindling, and household debt is rising. Additionally, new student loan repayment requirements are beginning to weigh on consumers. Thus, we forecast that overall consumer spending growth will slow towards yearend and then contract in Q1 2024 and Q2 2024. As inflation and interest rates abate later in 2024, we expect consumption to begin to expand once more.
Meanwhile, following strong growth in Q2 2023, business investment growth slowed materially in Q3 2023 as interest rate increases made financing activities more expensive. We expect this trend to intensify over the next several quarters as the Fed resists calls to cut rates until mid-2024. Residential investment, which had been contracting since 2021, began to grow again in Q3 2023. Persistent demand for homes and a dearth of supply was the driver. We don’t expect residential investment growth to improve until interest rates begin to come down, but pent-up demand is likely to spur growth thereafter.
Government spending was a positive growth driver in 2023 due to federal non-defense spending associated with infrastructure investment legislation passed in 2021 and 2022. However, growth is likely to slow in 2024 and 2025 as infrastructure spend out stabilizes. Furthermore, political volatility surrounding fiscal policy, debt, and outlays could impact government spending over the next few years.
On inflation, we expect to see progress over the coming quarters, but the path will probably be bumpy. Concerns about energy market disruptions due to the outbreak of war in the Middle East have moderated and oil prices have fallen. Meanwhile, price pressures emanating from dwellings and services continue to moderate, albeit slowly. We expect year-over-year inflation readings to remain at about 3 percent at 2023 yearend and that the Fed’s 2 percent target will not be achieved until the end of 2024.
Labor market tightness has been remarkably persistent in 2023, but recent data show some moderation. While this should continue over the coming quarters, we do not expect labor markets to unravel (as was the case in previous recessions). The tightness largely reflects a shrinking labor force as Baby Boomers retire. Indeed, this persistence should prevent overall economic growth from slipping too deeply into contractionary territory and facilitate a rebound next year.
Looking into late 2024 and 2025, we expect the volatility that dominated the US economy over the pandemic period to diminish. In the 2025, we forecast that overall growth will return to more stable pre-pandemic rates, inflation will hover at around 2 percent, and the Fed will lower rates to just below 3%. However, due to an aging labor force we expect tightness in the labor market to remain an ongoing challenge for the foreseeable future.
* There is no fixed timing rule for the NBER to call a recession. Determinations have taken between 4 and 21 months previously.
AND FROM BLOOMBERG: Let the 2024 Economic Predictions Game Begin
What will the new year bring for inflation and rates? Plus: Bananas, bananas, bananas. By Enda Curran November 27, 2023 at 9:05 AM PST
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Must-Reads
It’s the time of year when investor inboxes are flooded with predictions from Wall Street economists on how the world will perform in the year ahead. This season’s crop includes references to the weather and a children’s bedtime story that appears to have become obligatory reading.
Gregory Daco, chief economist at consultancy EY, is warning that the autumn breeze will turn into a winter chill for the US economy. JPMorgan economists led by Bruce Kasman say the Goldilocks case for an economy that is neither too hot nor too cold holds up—but they’re also warning about “boiling the frog.” Barclays and Oxford Economics are projecting “soft-ish” landings (not to be confused with a soft landing), while Goldman Sachs has gone with the theme that “The Hard Part is Over.” Morgan Stanley is warning about “The Last Mile.” Bank of America is calling 2024 “The Year of the Landing.”
However it all plays out, gazing into a crystal ball requires a significant dose of humility. It was only 12 months ago that forecasts for a US recession were widespread and markets had bet that the Federal Reserve would be lowering interest rates by now. Instead, the American consumer’s refusal to bend means many analysts are trying to forget those forecasts.
How long the good times last is an open question. US job growth is slowing and the unemployment rate in October rose to an almost two-year high of 3.9%. Consumer giants such as Lowe’s Cos. and Home Depot Inc. are signaling that spending on Main Street is waning. The global picture is equally mixed as China grinds through a real estate funk and Germany is dogged by weak manufacturing that likely means another recession.
For now, the year is ending on as good a note as could be expected. Shoppers eased up their spending in October and inflation continues to retreat, both core components of the soft landing the Fed is trying to pull off. But the biggest lesson from 2023 is that projections don’t necessarily correlate with performance. It’s worth noting that the Fed, too, had been forecasting a recession for this year.
“Our baseline ‘boil the frog’ narrative sees sluggish growth but sticky core inflation forcing central bankers to maintain restrictive stances,” according to JPMorgan’s economists.
In plain English, that means it’s too soon to declare inflation is back under control and interest rates will come down. The year 2024 remains, as yet, unknown.
How much more are Americans paying for household goods in these days? Well … more than you might think. Reade Pickert and Jennah Haque crunched the numbers for Businessweek and it’s not pretty. Here’s a sample of what they found; for the full deal, with lovely graphics not possible in a humble newsletter, go here.
Prices for many household items have increased significantly from January 2020 to October 2023.3D Illustration: Steph Davidson/Turbosquid(1), Getty(1)
Groceries
In an October installment of the Bloomberg News/Morning Consult poll, more than half of voters in several key swing states pointed to grocery prices as the main way inflation had impacted them.
In the four years before the pandemic, grocery prices increased less than 1%, offering shoppers a certain predictability.
Even then, consumers occasionally saw price spikes for specific items due to drought, disease or natural disaster. But the nearly ubiquitous increases of the last few years—and the brisk pace—have been bewildering.
A pound of ground beef now costs $5.23 on average, up from $3.89 in January 2020. Coffee is up some $2 a pound. Prices for fresh fruits and vegetables are nearly 14% higher. At one point, the price of a carton of eggs was triple its pre-pandemic price.
“It’s a huge slap in the face and I’m surprised that some people are saying inflation’s coming down,” said Ryan Essenburg, 50, who lives in California’s Bay Area. “It’s hard. You go get your bill and it’s like, ‘What’s happening here?’”
In October 2020, a Census Bureau survey showed a four-person household spent an average of $238.32 in a week on food at home. Three years later, a similar survey showed that figure had jumped to $315.22—roughly 32% more.
Grocery inflation is anticipated to return to less than 2% next year, but that might not offer consumers much relief.
“I don’t see any other way than food overall is going to be taking a higher share of people’s disposable income than before,” said Brandon McFadden, a professor in food policy economics at the University of Arkansas. “You can’t wiggle out of buying food.”
Housing
For most Americans, the cost of housing is by far the largest expense in any given month. As a result, the run-up in rental prices—which looks even more acute when using data from private companies like Zillow Group Inc.—has made it harder for many to save or have enough left over for other spending.
It’s also a difficult moment for renters to make the leap to homeownership. Mortgage rates are around a 23-year high, and home values have jumped nearly 42% since the start of 2020.
Those who owned homes before the recent run-up in mortgage rates and prices have been shielded from one of the most dramatic impacts of inflation, and the appreciation in home values has markedly boosted their wealth.
It’s “like winning the lottery in hindsight,” said Skylar Olsen, chief economist at Zillow.
But it’s not all roses for homeowners. The rapid climb in home equity has pushed up property taxes, and the surge in mortgage rates has prevented many of them from moving.
Anthony Ford, 35, bought a home shortly after paying his way through college. He and his girlfriend have looked at buying a larger place more suited for their needs, but based on their accounting, it would likely be five to six times their current housing payment.
“I bought a very modest house and did all these things that we felt like we were supposed to do, like live within our means, don’t overspend, save. And it all just keeps getting further away from being able to take that next step,” said Ford, an analytics engineer outside of Dayton, Ohio.