KOLOA, Kauai–Is a “soft landing in the bag” for the U.S economy? One economist told credit unions he believes that’s the case.
Speaking to Rochdale’s Volunteer Leadership Institute, Dr. Byron Gangnes, professor emeritus of economics and UHERO senior research fellow at the University of Hawaii at Manoa, said 2023 turned out to be a “really good year” and 2024 holds promise for much of the same.
Even the cooling of the job market and slightly higher unemployment is a good sign, according to Gangnes, who said the slowdown in hiring reflects the Fed’s efforts to bring inflation down to its target of 2%, although he forecast that is actually several years off.
“But there are areas of substantial growth that remain, even though the economy has been slowing,” he said. “Consumer spending is going to be the key in 2024 to help the overall economic performance.”
Speaking just one day after the new GDP numbers were released, Gangnes said there is a “a lot of momentum going into this year.”
But there are several areas of particular weakness, according to Gangnes, including:
Real Estate
Gangnes cited data showing sales for existing homes fell by approximately 40% as the Fed raised rates. A lack of inventory in most markets isn’t helping, either.
When he asked his audience about refinancing activity, attendees laughed.
Manufacturing
Gangnes said high rates have also slowed manufacturing due to lower investment in capital, while the strength of the U.S. dollar has hurt exports.
A Broader Look
The broader slowing in the economy has been more measured, said Gangnes. Labor markets have been easing but not collapsing, and wage gains are now rising faster than inflation.
Overall, Gangnes reminded, the labor market (3.7% unemployment currently) remains tighter than the Fed would like. Higher unemployment will likely be necessary to “finish this adjustment,” according to Gangnes.
He noted there has been “considerable progress” made in the fight against inflation, but core service inflation remains a concern, including in categories such as travel. The two areas contributing most to inflation right now are housing and non-energy goods.
Remaining Issues
The key to a soft landing for consumers has been that consumer spending, which has been relatively strong and “perhaps too strong,” continues. “But it is likely to cool,” he said.
According to Gangnes, the economic tailwinds include job security and a healthy labor market, wealth gains (particularly from housing), and receding inflation, which supports income gains.
The headwinds include that past high inflation has left high prices high; high interest rates are weighing on autos and other durables spending; there is limited but growing financial stress, and excess pandemic-era savings have been depleted.
The Outlook
Looking forward, Gangnes predicted restrained global growth, in large part due to China, which is underperforming the expectations of many, primarily due to a real estate bubble and an overhang of debt.
Gangnes forecast that 2024 will be a weak year for overall global growth.
As for the U.S., he is forecasting the much expected soft landing, no recession and a modest increase in unemployment. He said he believes it will be 2028 before the country reaches the Fed’s target of 2% inflation annually. He joined with credit union economists who have been predicting rate cuts will come in 2024, but he expects those will not happen until May at the soonest.
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