The U.S. economy avoided disaster in 2023, achieving a significant drop in inflation while avoiding recession.
Policymakers have overcome severe challenges to slide the economy toward a “soft landing,” but their task is far from over. They aim to further slow inflation, at the risk of triggering a recession that could lead to mass layoffs.
Still, economists are optimistic about the outlook. Experts widely expect the U.S. economy to slow, but not shrink, over the next year. As a result, the country will be able to maintain economic growth while bringing inflation closer to normal levels.
“The hard part is over,” a Goldman Sachs report declared last month.
However, there are also many potential pitfalls. The Fed currently expects to cut interest rates next year, which could ease borrowing and increase spending, a move that could trigger a rebound in inflation.
Many of the world's major powers, including the United States, are planning elections next year. Changes in economic policy in one or more major countries could create uncertainty and disrupt global markets.
As if hedging its bets, the same Goldman Sachs report warns of “higher-than-usual risks to the overall economic outlook.”
Despite many Americans' pessimism about the economy, there have been many positive signs in the nation's performance in recent months.
Inflation has continued to decline from a peak of about 9% last summer and is now within 1 percentage point of the Fed's target interest rate. Although employment has slowed recently, it remains steady.
Meanwhile, economic growth soared. The U.S. economy grew at an annualized rate of 4.9% in the three months through September, more than double the growth from the previous quarter, according to an October government report.
Rising inflation prompted the Fed's landmark announcement earlier this month that it plans to reverse its near-historic rate hikes with a series of rate cuts next year.
Lower interest rates ease the burden on borrowers, allow consumers to make smaller credit card payments, and allow businesses to invest in projects at lower costs. In theory, such policies could trigger a burst of spending that would boost the economy.
Gene Hadzius, chief economist at Goldman Sachs, said the potential for central banks around the world, including the U.S., to cut interest rates is “important insurance against recession.”
But some economists warn that cutting rates comes with its own risks.
In a report last month, Morgan Stanley characterized the possibility of rate cuts as a “Goldilocks dilemma” for central banks, saying that raising interest rates too high risks a recession, while lowering rates too low could lead to inflation. It threatens recovery. After all, a potential spike in spending could increase demand and push prices back up.
Part of the dilemma is that Morgan Stanley expects interest rates to fall but remain fairly high, leading to slower growth. This growth forecast also holds true for many other prominent forecasters, including JP Morgan, the International Monetary Fund, and the Organization for Economic Co-operation and Development (OECD).
Another major uncertainty for next year comes from a number of elections in some of the world's largest economies.
In the spring, Indian voters go to the polls to choose the next prime minister. And in June, Mexico will choose a president. The United States will likely do the same in the coming months.
S&P Global's 2024 economic forecast last week cited an “unusual number of countries holding important elections” and said “a busy election calendar will create policy uncertainty.”
Federal Reserve Chairman Jerome Powell warned at a press conference in Washington, D.C., earlier this month that the fate of the economy remains uncertain.
“Inflation has eased from high levels, and this has happened without a significant increase in unemployment, which is very good news,” Powell said.
“However, inflation is too high and continued progress towards lowering inflation is not guaranteed and the path is unclear,” he added.