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Economic Forecast: Mostly Sunny, With a Chance of Clouds

Stable interest rates and cooling inflation make for a pleasant outlook, though that’s far from guaranteed.

By Lesley Kennedy  |  December 20, 2023

The economic forecast looks sunny, but it’s always wise to pack an umbrella for surprise storms, economist Emily Mandel says.

Mandel serves as the lead revenue forecaster at Moody’s Analytics, overseeing research around state and local governments and the municipal bond market. At NCSL’s Forecast ’24 meeting, she described an economy that has improved much more than expected over the past year.

“We’re definitely in a better spot today than we were a year ago,” she says. “Inflation’s coming down, and the labor market is still very strong. However, interest rates are high, we’re expecting slower growth, and there’s a lot that can throw us off track.”

“People are saying things are expensive, but at the same time, this demand for goods and services has remained very, very strong.”

—Emily Mandel, Moody’s Analytics

Avoiding a recession, weathering high interest rates and seeing inflation cool make for a sunny outlook, Mandel says, even if that’s far from guaranteed.

The economy, she says, has been through a lot over the past year, from those high inflation and interest rates to global tensions and worker strikes. Still, Mandel adds, you wouldn’t guess there’s any uncertainty by looking at the labor market, where unemployment remains below 4% and the workforce growth continues.

Inflation Remains Top of Mind

“If you think back a year or two, we had a massive increase in inflation coming out of the pandemic as we had those supply chains very disrupted,” she says. “This reached a peak following Russia’s invasion of Ukraine when we saw that spike in oil prices reaching nearly 10% year over year for the CPI growth, which by American standards is very high.”

But the good news, Mandel adds, is that the spikes are coming down.

Inflation is at about 4% year over year now, she says. “That’s higher than the target of around 2%, but it’s very close.”

The combination of supply chain normalization and restrictive interest rate policies from the Federal Reserve are also factors, as is the availability of vehicles, she says, noting the pandemic disrupted the automotive industry in particular.

“We’re only now starting to see inventory starting to increase,” she says. “Dealership lots are finally filling up again, and we’re starting to see some downward pressure on prices as a result.”

Mandel also points to housing costs.

“Housing makes up around 40% of core CPIs, so that’s 40% of what consumers spend absent food and energy every week,” she says. “Part of this is related to mortgage rates, but pressure on the rental market has really begun to ease.”

Meanwhile, she says that a pullback in lending should help avert another significant decline like the 2008 Great Recession. She says lenders have been relatively conservative, especially regarding mortgages.

The largest area of potential risk, Mandel adds, centers on commercial real estate, especially as it relates to the post-pandemic work-from-home trend.

Consumer Dissonance

On the not-so-sunny side of the economic forecast, she says financing and housing have gotten very expensive, and surveys show consumers are not happy about it.

“They’ve seen these major increases in costs, particularly for some of the costs that are most visible day-to-day in their lives,” Mandel says, noting gasoline, vehicle and airline prices in particular.

For example, that latte that used to cost $3 and is now $5? Sorry, but you’re not getting that $3 latte back again.

“Consumers are seeing this, and they just feel like the economy hasn’t really gotten any better,” Mandel says. “They feel like the labor market is perhaps weakening a little bit, and prices are still high. Now, prices aren’t rising as fast, but perhaps that’s not fully internalized because that monthly bill hasn’t actually improved at all.”

This is important, she says, because consumers drive the economy.

“They’ve been the major factor responsible for this very strong recovery that we’ve had from the COVID pandemic, and recessions are inherently a collapse of consumer confidence,” Mandel says.

But while consumers say they’re not so happy, they’ve continued spending.

“And I think the other kind of surprising dissonance we’re seeing now in the current economy is that people are complaining,” she says. “People are saying things are expensive, but at the same time, this demand for goods and services has remained very, very strong.”

So why have consumers kept up with spending despite rising costs that are only now leveling out? Savings built up from pandemic government stimulus money.

Mandel says the estimated savings totaled about $2.5 trillion at its peak, and estimates show about $1 trillion of that money has been spent.

“The main takeaway is a huge amount of money got saved,” she says.

Looking ahead, she says the labor market is strong but that the Fed will likely keep interest rates where they’re at for the foreseeable future.

“We’re not going back to that low-interest-rate environment prior to the pandemic,” she says. “As a result of that, we’re going to get some pullback in consumer spending, some pullback in investment and altogether a slower economy.”

She says she expects to see a slight increase in the unemployment rate but noted that’s accompanied by a fairly significant reduction in the pace of job growth.

“So, it’s not a recession, but it’s definitely slower,” Mandel says. “Those good times of hundreds of thousands of jobs per month, we expect that to come to a close by this time next year.

“That said, we expect the strength in consumer spending and the slowdown in inflation, which has been coming in relatively gracefully, will allow us to keep moving this economy forward, and will allow us to keep powering this through and avoid a recession.”

Lesley Kennedy is NCSL’s director of publishing and digital content.

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