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The U.S. was supposed to suffer a recession from higher interest rates. It didn’t. Next economists predicted a big slowdown in growth. No dice. And now? The economy is going to be just fine after all.
That’s the latest forecast by the nation’s leading business economists. U.S. gross domestic product will expand at a 2.2% annual pace in 2024, up from a prior forecast of just 1.3%, the National Association of Business Economists predicts.
Just how strong is that? The top sustainable speed of the U.S. economy is generally seen around 1.8% growth.
In other words, the economy should continue to perform above expectations. GDP rose 2.5% in 2023 and 1.9% in 2022 as the damaging effects of the pandemic faded.
This wasn’t in the script. Higher interest rates were supposed to quash consume spending — the main engine of the economy — increase layoffs and raise unemployment.
Instead, consumer spending has stayed strong, aided by arguably the best jobs market in decades. Unemployment sits near a half-century low of 3.7% and the economy is still adding jobs.
Most businesses, for their part, have recorded higher profits and see little reason to scale back.
The economy actually expanded faster in the second half of 2023, capped off by the strongest quarter of growth in a decade if the pandemic recovery is excluded. First-quarter GDP is also on track to rise close to 3%.
More surprisingly, inflation has subsided a lot faster than almost anyone on Wall Street
SPX
or the Fed predicted.
The rate of inflation using the central bank’s preferred price gauge slowed to a yearly rate of 2.6% as of December from a 40-year peak of 7.1% in mid-2022.
The combination of steady economic growth and decelerating inflation has raised optimism among consumers and businesses to the highest level in a few years. Some lagging industries such as manufacturing are already starting to perk up.
The optimism is especially evident in robust corporate earnings and record stock-market gains, which in turn are acting as economic accelerators, economists say.
The current trajectory of the economy puts the Fed in position to lower interest rates later in the year. That would add even more kindling for stock-market gains, business investment and economic growth.
Don’t be surprised, then, if Fed officials also raise their GDP forecast when they issue their quarterly economic forecast on March 19-20. Right now they’ve penciled in 1.4% GDP growth in 2024.
“The consensus is beginning to come around to a stronger growth view,” said Neil Dutta, head of economics at Renaissance Macro Research. Dutta has been arguing for months the economy was sturdier than most forecasters believed.
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