Soft landing and presidency at stake as US skirts recession amid a year of economic resilience
▶ Economy to play a defining role in American politics in an election year, with far-reaching implications
After confounding expectations this year, the US economy is set to play a central role in American politics in 2024 even as the battle to tame inflation appears to be won.
Economic growth has exceeded projections, inflation has significantly moderated, job gains are strong while unemployment is at a near-historic low, and consumer spending is still healthy.
Compare this with the UK and Europe, where recession fears persist, or to the US’s economic rival China, which is staring at deflation.
Indeed, the US economy was resilient this year.
And it will play a defining role in 2024, with momentous implications for borrowers, markets, the global economy – and the US presidential election.
US Federal Reserve Chairman Jerome Powell is on the verge of accomplishing something exceptionally rare: achieving a soft landing.
Fears of a recession dominated the earlier part of the year, but those have since given way to growing optimism that the Fed can achieve the much-fabled scenario of bringing inflation down without a steep downturn.
“My baseline is that we’ll achieve a soft landing,” Treasury Secretary Janet Yellen said before the Fed’s December 1213 policy meeting.
The Fed’s preferred inflation metric has climbed down significantly since last year to its current 2.9 per cent level, and the central bank expects this to drop further. Part of what has made the Fed’s tightening cycle remarkable is that much of it occurred without widespread job losses. The unemployment rate still is below 4 per cent, and employers are adding a healthy number of jobs.
“Everything indicates that inflation has gone down and that the Fed has accomplished its task of lowering inflation,” said Brenda Samaniego de la Parra, assistant professor at the University of California, Santa Cruz’s Economics Department.
With interest rates at their peak, they are expected to be a further burden for consumers next year. Borrowing costs will hurt consumers even more with pandemic-era savings used up. Economic growth will slow – although still be healthy – and consumer spending will dip.
The labour market is expected to cool and wage growth to fall closer in line to inflation.
“Everything seems fairly sustainable right now, in terms of the likelihood of a soft landing,” Ms de la Parra said.
However, those who expect everything to fall into place for the US economy next year are likely to be disappointed.
If this year has proven anything, it is how unpredictable the economy can be. When placed against the backdrop of geopolitics, it only complicates things further.
Forecasters largely believed the US was heading for a recession this year. That did not happen – in fact, the economy showed remarkable strength.
The sudden collapse of Silicon Valley Bank sparked fears of a new global financial crisis. The bank failure hurt markets and caused the Fed to slightly alter course in its tightening cycle.
The outbreak of war in Gaza also brought fears that it could create a ripple effect across the global economy, although so far it is proving less consequential to inflation than the war in Ukraine.
There is also the possibility that the Fed will keep rates too high for too long, which could create a steep economic downturn. That, alongside the simultaneous threat of not raising them high enough, creates what officials call a “two-sided risk”.
“I think it’s fair to say there is a lot of uncertainty about going forward,” Mr Powell said earlier this month.
“We’ve seen the economy move in surprising directions.”
This uncertainty will be felt as soon as January, when the federal government faces a potential shutdown.
The economy is expected to be a determining factor in the 2024 US presidential election.
For all the progress made in lowering inflation this year, there remains a disconnect as voters believe their financials are worse off than before President Joe Biden assumed office. With a majority of Americans disapproving of Mr Biden’s handling of the economy, expect the incumbent to tour across the US touting his “Bidenomics” agenda and continue to go after junk fees such as exorbitant hotel surcharges.
However, with voters believing economy-related issues to be the biggest problem facing the US today, Mr Biden has a tall task ahead of him.
Expect former president Donald Trump – the Republican Party’s likely candidate – to hammer Mr Biden on the economy that he would say has left Americans behind.
On November 5, voters will cast their ballots in favour of whom they can best trust to safeguard their financial futures. While markets will rejoice at Mr Trump’s promised tax cuts should he return to power, the global economy must brace for a return to his isolationist agenda.
America’s foes and allies will be holding their breath.
Fears of a recession have given way to growing optimism that the Fed can bring inflation down without a steep downturn