This Week’s Economic Update, December 18, 2023

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I want to wish all of you a Merry Christmas and a Happy and Blessed New Year.  Hopefully 2023 is ending on a high note for you and your family.  This will be my last economic update of 2023.  I will be returning on Monday January 8.  I trust that all of you will be taking time to spend with family, as I am.  Enjoy the moments you are able to spend with them this season.

The economy continues to resist experiencing a slow down.  After a slight drop in October, retail sales rebounded in November, rising .3%.  Even pulling out automotive sales did not dampen the growth in consumer spending.  At 4.1% growth over the past year, we are at par with the pre-pandemic period of 2018 and 2019.  In spite of liquidity levels tightening and debt growth levels flattening, the consumer continues to spend.  While the polls show most people are not happy about the economy, they seem to be rather comfortable with their own economic state, at least optimistic enough to believe they do not need any level of cautionary savings at this time.

Forecasting the future is never exact and typically always wrong.  However, with a quarter and my forecast you can probably purchase a bad cup of coffee at a really cheap diner.  There are a number of reports that I have been watching that tell me that 2024 should be roughly equal to 2023.  Nothing is reflecting a coming recession.  Inventory levels, except for automobiles, are falling to critical levels.  This should support the manufacturing sector of the economy.  While I do not see it moving to an expansion level, I do see it hovering at a slight contraction zone for most of 2024.

The service sector, which occupies over 70% of our economy, continues to expand.  This is where much of the consumer continues to spend.  Travel appears to have some legs.  At least during the first quarter, there is plenty of demand from vacationers trying to avoid the winter blahs.

Inflation is not gone.  Over the last 6 months the growth in prices has leveled out.  Between the supply chain corrections and interest rate increases, we have squeezed out the low hanging fruit on the inflation tree.  We seem to have baked in a 3.1% annual inflation rate.  Trying to get below 3% will not be easy.  If the Fed is still committed to a 2% inflation rate, the bias should be toward another rate increase.  However, in his comments this week, Chairman Powell was decidedly pushing a more expansionary track talking about rate cuts in 2024. 

The dollar is starting to weaken from a period of extreme strength.  This will create a small amount of inflation for all imported goods. With continued consumer demand along with a healthy labor market, I cannot foresee an inflation rate below 3% in 2024.

Energy prices will stabilize where they are unless there is a major international incident that will disrupt world wide supplies or transport. Driving demand as well as greater fuel efficiency has driven up available supplies while the US is at all time oil production levels.  Unlike 2023, the oil prices should not negatively impact the level of inflation.

The housing market is going to be the focal point of 2024.  Construction over the past two years have given us a significant oversupply of multi family structures.  Interest rates continue to be high enough to box out many buyers that are on the margin for single family detached products.  New construction will continue to lag in most areas as land prices as well as construction material prices remain too high.  I do foresee a slight loosening in the existing dwelling market emerging by mid to late 2024.  The earliest Baby Boomers are getting close to 80 years old.  While many in this generation have been able to stay in their homes through family help as well as renovations that allowed them to remain in a safe environment, that will change.  By 2026 there could well be a glut of housing on the market driving down prices. Sadly, I do not see the construction trades doing well for many years. 

Overall, I would stand on a forecast of 2% growth in the US Economy during this coming election year.  I am not seeing a recession on the horizon without some sort of significant historical event occurring.  Sadly, based on the conditions around the globe, that risk could be as high as 33%. 

Have a wonderful rest of your holiday season. See you Next Year.

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