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2023: American Consumer 1, Economists 0

The economic outlook proved all wrong, as it became much more positive than we had expected, with a solid economic expansion and a workforce that refused to give up.
If there were a phrase to describe the economic situation that year, it would be substantial.
The employment market was strong. However, the inflation rate initially kept its status quo. However, it began to slow down, too. CKS performed well, and the economy grew faster than anticipated.
In the wake of the highly-anticipated recession?
"This the same time in last year the Chair Powell declared that the Fed will "stay in the game and increase rates until the task was completed," Madison Faller, global strategy director of J.P. Morgan Private Bank, quoted in the bank's final year review. "While the inflation rate was decreasing, it was still high, and the economy was in disarray. With what appeared to be a huge uncertainty, many CEOs stated they were expecting a U.S. downturn. After that, there was bank stress, the debt ceiling, the government shutdown, and the geopolitical turbulence."
"Today, inflation in the world's developed countries has nearly halved, though growth has continued to be steady," she added. "That robust pace is set to diminish. However, the recession that we worried about never came to pass."
When looking back, it's evident that the single-word description is not enough to convey the consequences of the COVID-19 pandemic as well as the resurgence that followed, leading the economy to act as it did in ways that defied what was considered to be the norm of majority economists and the politicians.
It would also be untrue to try and explain everything with the claim that it was a matter of flooding the market with cash, either in the form of the stimulus that was approved by Congress or the Federal Reserve that pivoted from excessive ease in monetary policy to record tightening over less than longer than a year. However, that could explain a portion of aspects of what transpired.
But in the end, the American consumer was too adamant to be spooked by the doomsayers.
After being criticized by critics claiming that the inflation rate would be "transitory" after prices skyrocketed between late 2021 and 2022, Powell changed his mind in the middle of March 2022 when he began increasing interest rates rapidly. However, while inflation came down from its high of 9.1 percent in July of 2022, it was 6.5 percent. The Fed kept raising rates by a further 1 percent until it stopped during July, when the economy began to slow down, and inflation slowed. But, despite the forecasts of recession, the economy, particularly the labor market, remained healthy throughout the year. This starkly contrasted the theory that predicts unemployment will increase if interest rates rise.
In the background, however, there were improvements in supply chain management, and the pressure on borrowing costs due to increased interest rates was beginning to lower inflation. The housing market, mainly affected by mortgage rates, fell as they were at 8% on 30-year fixed-rate loans. The consumer price index has been running at 3.1 percent.
However, consumers continue to mention inflation as their primary concern, which has negatively impacted the popularity of President Joe Biden.
Between late 2021 and 2022, a controversy erupted where many blamed Biden's $1.9 trillion American Rescue Plan for stoking inflation. Many economists believe there was a lot of money flowing worldwide, which would encourage spending and keep prices up. The cost of gasoline, the most evident sign of inflation and price hikes for most customers, topped $5 per gallon on June 20, 2022.
A few economists suggested that inflation was driven less by excessive demands for services and goods but instead by a shortage in availability, be it of electronics or household products. The supply chain began to break up, and energy prices began to fall; even though important suppliers like Saudi Arabia and Russia enacted production reductions, inflation began to fall, but the cost of goods and services remained excessive.
At present, inflation is coming back lower, close to the 2 percent target set by the Fed for its annual goals. However, it may be 2025 before the threshold is achieved. The latest survey on consumer attitudes by the University of Michigan shows that Americans decreased their expectations of inflation in the coming twelve months in November to 3.1 percentage points instead of 4.5 percent a month prior.
"Inflation cycles continue to be caused by the effects of pandemics and supply distortions," Neil Shearing, group chief economist at Capital Economics, wrote in the company's outlook for 2024. "This is among the reasons why we've suggested that the post-COVID scare to inflation is more similar to the shock to inflation that came after World War Two than the inflationary events of those of the 1970s."
Shearing is not any return to the period of deflation or the near-zero interest rate regime that preceded the outbreak.
"But 2024 could be the year that core inflation starts to return to the central bank's comfort area of about 2%.."
Growth Proves Stronger Than Forecast
Incredibly, the economy's growth was more robust than predicted in 2023. This was even though interest rates climbed to levels that had not been seen since the 2000s. Inflation also continued to grip consumers' wallets. The main reason was the fact that Americans were able to accumulate savings. Jobs also remained abundant. Also, wages grew in a manner that was initially less than inflation and increased in real terms when inflation declined in the latter quarter.
The country's gross domestic product increased by 2.2 percent in the initial quarter. Then, it slowed to 2.1 percent before rocketing to 4.9 percent growth during the final quarter. The Fed has recently revised its year-end projection to 2.6 percent. It would represent the most robust result in the past four years, except for the pandemic recovery year 2021.
Richard de Chazal, macro analyst at William Blair, characterizes 2023 as "a year best described in terms of what didn't occur to the things that did." This is a reference to:
-- "There wasn't a recession."
-- "Energy prices didn't go up to the moon."
"We didn't have another fatal pandemic."
-- "The failure of several regional banks, such as the country's 16th-largest bank, the United States, did not lead to a market collapse."
-- "There wasn't a shutdown in the federal government or standing-off on the debt ceiling came to an end in a whisper, not with the sound of a clap."
-- "The ongoing conflicts that are taking place between Ukraine and Gaza have not yet been able to escalate into larger regional conflicts as well as World War III."
The Job Market Just Kept on Going
In 2023, anyone looking for work could have one. In January, there were 10.7 million jobs available, which grew to 11.2 million by February. Although the number of positions opened started to decrease since the demand and supply of workers became more positive, there were 8.7 million jobs open at the closings.
The wages, however, have been steadily increasing. The hourly average earnings for all workers in the private sector increased by 4 percent at the end of November compared with the previous year. People with lower incomes are doing better, as the bulk of the employment growth in 2023 was in sectors such as hospitality and leisure, with wages that tend to begin lower.
The economy is slowing down towards the end of the year. However, November's employment increase of 199,000 is more than the amount needed to maintain the economy at a high level. The overall monthly rate of job growth averaged 233,000 during 2023.
LinkedIn's monthly reports on the job market for November showed "pockets of progress" with hiring, following an earlier sluggish start to the year. The report also says, "The employment market has been quite resilient and more robust than we expected."
A bright spot was the rise in hiring for tech, which had grown following the outbreak, only to make announce massive layoffs at the beginning of 2023. The announcement sparked fears of an even more significant drop in job growth.
"In November, the hiring rate in technology saw its lowest third decrease in 2023's monthly average, and its hiring rate increased 2.6 percent since July (versus general hiring, which is lower by 3.1 percent from the beginning of July)," LinkedIn said.
The unemployment rate finishes the year at 3.7 percent, after having started at 3.4 percent. These are both very low according to the standards of historical precedent. Most economists expect to see unemployment rates of around 4% by 2024. This is a figure that's considered to be robust.
The Federal Reserve Pivots - and Then Again
"The Fed "pivot" can be an event that Wall Street loves, as it usually signals a buoyant market if the central bank cuts interest rates. If interest rates are excessive, affecting the economy and the balance sheets of companies, an indication that they are about to fall often kicks an explosive rally, as was the case in the last several days.
Markets are now convinced that the Fed is all set on cutting rates and is preparing the plane for the "soft landing" in 2024.
"I believe there's plenty of optimism about the data in the present," says George Calhoun, Director of the Quantitative Finance Program at Stevens Institute of Technology.
Soft landings are scarce and far from the norm since the Fed tends to overshoot runways. Although it estimates the probability of a smooth landing at 70 percent, Ned Davis Research does provide a scenario that may change that projection.
"Given the fact that our prediction is a growth rate that's below the trend by 2024, the transition into recession may be relatively simple," Veneta Dimitrova, the senior economist for research of Ned Davis Research, wrote in the past. "The record should also be a cause for caution since most Fed tightening cycles have concluded with a recession averaging 24 months after the initial rate increase." This would mean that we could put the date at March next year.
One aspect could influence the"soft landing" scenario, which differs this time. Inflation increases have less of an impact in this period. There are a variety of plausible explanations for this; the majority came into play during 2023.
The balance sheets of households and companies were much better than during the lead-up to the financial crisis of 2007-2009 and the recession. The demographics of the workforce favor being tighter than it was in the past and could result in lower layoffs should the economy fail. The shifting in the U.S. economy from manufacturing to services has altered how companies thrive. Tech giants like Google generate large amounts of cash, which is why they are small borrowers.
"The rate of interest sensitivity in the economy is much lower than when we first began the crisis," 2007, says Cindy Beaulieu, chief investment director at Conning North America.
Housing Learns to Live With Higher Rates
The housing market, one of the most susceptible sectors to rate fluctuations, has changed. The majority of today's mortgages are rated lower than 4 percent. Existing homeowners have yet to be willing to trade in an interest-only mortgage for an affluent one that could include a brand-new home. This has resulted in the marketplace with only a small selection of homes. The median house value in the third quarter this year was $431,000, which is 31 percentage points higher than at the start of 2020.
"There's an imbalance in demand and supply," claims David O'Reilly, chief executive officer of Howard Hughes Corp., one of the primary developers of communities planned for development.
The 8% mortgage rates, which briefly sank in October, have had little impact as anticipated in previous years. Home sales for new construction are up since builders often offer below-market loans to entice potential buyers.
Additionally, Americans are getting married earlier, putting off having children, and changing traditional patterns that underpin the market for housing.
"It is a group that is driving supply and demand. People, especially baby boomers, live longer in their homes than the previous generation. The length of stay has increased from 7 to 13 years."
Government Dysfunction Becomes the Norm But Does Not Derail the Economy
In the Aesop fable "The Boy Who Cried Wolf," the shepherd's son repeatedly warns villagers about a wolf coming after their sheep. However, his warnings are untrue. When a Wolf does show up, the villager's belief is not based on the sign, and the sheep get devoured. This has yet to happen at Capitol Hill. In 2023, however, the threat of a government shutdown due to Congress's inability to approve a debt ceiling hike occurred twice. Each time, Congress agreed to a quick-term resolution at the last second to keep the government fully funded. At the very least, up to the beginning of January.
The initial budget fight resulted in former Speaker Kevin McCarthy's job when some hard-right Republicans refused to back McCarthy as a California Republican when he agreed to a deal that he reached with Democrats for keeping the government in operation. However, the current speaker, Mike Johnson, also a Republican, is in charge of the government with only a tiny majority. Is Johnson able to make it through the budget's next deadline?
Many economists think there's a cost to trustworthiness for government officials of the U.S. government and higher interest rates for federal debt. To date, however, politicians are not likely to be changing their behavior as it is yet to be determined what the market will do to the 2024 election.
Oil Prices Do the Opposite of What the Experts Predict
Just after Russia attacked Ukraine during the latter part of February 2022, analysts warned that Europe could lose access to oil supplied by its eastern neighbors, who provided the bulk of its fuel. The cost of one barrel of oil went up by about $20 to $117 before reaching a peak at $123. When, in October, Hamas militants launched a surprise attack against Israel, There was a fear about the oil supply being damaged, and prices climbed to $92. The cost of oil today is at a worldwide market price of $78 per barrel following the recent increase caused by repeated drone attacks against vessels within the Red Sea. In the meantime, Russia and Saudi Arabia are reducing production to keep prices steady.
However, there's no oil shortage, and America has become a critical factor in keeping the price of oil at a low level. According to the economist Joseph Politano documented in his blog Apricitas Economics, "the U.S. produces more energy than it has ever done before and the exports are being shipped abroad - - net U.S. energy exports have been at $70 billion during the last twelve months despite falling gas and oil price," Politano notes.
LNG exports to Europe from the U.S. are filling the shortfall caused by the disappearance of Russian gas.
"In Q3 of the quarter, American LNG accounted for 19% of all EU imported natural gas, compared to 15% in all Russian gas sources."
America's role in the global energy market is not recognized, even as Republicans blame President Biden for what they see as a lack of "energy Independence." But America is the U.S. and has had the most immense amount of gas and oil throughout its history.
Overall, 2023 was quite the opposite of what many people had predicted. It is still being determined if 2024 will continue this trend or if it will go back to normal. Whatever that means, it is likely to happen.

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