Is it time to pop the economic champagne cork?

Published March 14, 2024

By Michael Walden

For several years in a row, surveys showed households rated the economy as their biggest issue. This was logical because Covid still impacted us, unemployment continued to be relatively high, many businesses couldn’t find workers, and prices were accelerating at high rates. There was much for people to worry about.

Recently, polls show our collective concern about the economy is now the number two issue, behind immigration. This demotion of worry about the economy parallels an improvement in consumer confidence. While consumer confidence is still well below pre-pandemic levels, it has steadily risen for almost a year. 

There are several reasons for this good news.  Prominent among them is the fact we have been free of a recession since 2020. Numerous economists predicted a recession in 2023, but strong consumer spending, moderate energy prices, and spending from new federal programs for infrastructure and the climate kept the economy growing during the year.  

This positive picture of the economy can be seen in the major measures used to gauge the economy. The unemployment rate is very close to the rate in late 2019. Total jobs in the country – as well as in North Carolina – are well above the levels before Covid hit. Additionally, the number of job openings per unemployed workers is now back to normal, a sign the labor shortage experienced a couple of years ago has diminished.

And although the inflation rate is still higher than it was in 2019, it has significantly moderated. The latest annual inflation rate is close to 3%. This is much lower than the annual inflation rate’s peak of over 7% in mid-2022. While the Federal Reserve’s target annual inflation rate of 2% has not yet been met, it is within sight.

Perhaps the most troubling statistic is the one continuing to show the purchasing power of household earnings still lower than prior to the pandemic. But the good news is this important measure of economic health has been rising for almost a year.

Hence, it appears the Federal Reserve has achieved the much sought-after “soft landing” in the economy. A soft landing simply means the Fed has been able to reduce the rate of price increases without causing a recession. This is in contrast to the “hard landing” of the economy crashing into a recession.

So does all this positive news mean the economy will be free of challenges in 2024? Unfortunately, there are many reasons the answer may be no. While there likely won’t be an official recession, there’s a good chance some obstacles will be in the way of smooth economic sailing.
We may have seen a preview of economic choppiness in the most recent national labor market report. While businesses added a robust 275,000 jobs, the gain wasn’t  enough to keep the jobless rate from rising from 3.7% to 3.9%. But the most troublesome number was the sharp increase in permanent layoffs. Permanent layoffs jumped from 174,000 in January to 1.7 million in February.   Another alarm bell was a large increase in part-time work compared to full-time work.

There’s also possible trouble with consumer indebtedness. Both the share of personal income devoted to debt payments as well as credit delinquencies have jumped. While both are far under all-time highs, if these upward trends continue consumers at some point will be forced to moderate their spending. And since consumer spending dominates the economy, a slowdown by consumers will mean a slowdown for the entire economy.

There are already some sectors facing serious challenges. Key segments of manufacturing have experienced drops in production. Commercial real estate, especially in central cities, has higher than usual vacancy rates as businesses adjust to hybrid working. Many downtown businesses are facing reduced sales with a lower daily workforce.

Last are challenges from unforeseen events, especially on the international stage. There are two on-going “hot spots” in the world, in Ukraine and in the Middle East. Could these conflicts intensify, spread, and further involve the US?  If so, how will businesses as well as investors react?
Also, to make the international stage even more challenging, there are two areas of the world that could evolve into new “hot spots” and entangle the US. They are Taiwan and North Korea. If China were to invade Taiwan, and North Korea were to attack South Korea, our country would likely become directly involved, creating tensions and implications that would impact the economy, probably negatively.

Hence, while the economy looks reasonably good now with no recession in sight, that doesn’t necessarily mean we can sleep soundly at night and assume there will be smooth sailing the rest of the year.  Often the unexpected has a way of impacting us when we least expect it.  
While many have concluded we have finally reached a year when we can put worries about the economy aside, that may be too optimistic of an attitude. In 2024, can we sleep with both eyes closed, or should we have one eye open to keep watch on the economy?  You decide.

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.