What to Watch: Tiptoeing Into a Soft Landing
What a difference a year makes.
Heading into 2023, the talk was all doom and gloom and recession, with economists broadly expecting that the interest rate hikes needed to tame inflation would also send the economy into a tailspin.
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It wasn’t a great year, but it wasn’t a disaster. And now, as fashion moves into 2024, the best guess is that the economy will slow, but not crash.
“In 2023, the world largely returned to normal after about two-and-a-half years dominated by the COVID[-19] pandemic,” said Stephen Stanley, chief U.S. economist at Santander, in an analysis. “As the year ends, the dominant feature of the landscape is that the real economy [which excludes the financial sector] continues to outperform expectations, but inflation has rapidly cooled anyway, and investors appear optimistic that this best of all worlds combination can continue.”
Economists are now looking for U.S. gross domestic product growth to slow to a 0.5 percent annualized gain in the first half and reaccelerate in the back half, Stanley said.
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Since the consumer economy is about two-thirds of the whole economy, that speaks to a leaner start to the year.
Stanley predicted shoppers would finally cool down. The holiday shopping period was perhaps a harbinger of that. While estimates of sales growth were 2.4 to 3.1 percent, that was before inflation and was far below the increases seen during the boom years post-pandemic, indicating consumer shopping behavior could at last be returning to the norm.
“Over the last couple of years, consumers have consistently outperformed consensus expectations, propelled by elevated household liquid assets and a robust labor market that generated solid income growth,” Stanley said. “I rode that theme in both 2022 and 2023 with spectacular results. There is a natural temptation to stick with a winning hand, but I see the fundamental underpinnings for the strong consumer spending narrative fraying.”
The economist argued that, outside the most affluent consumer class, household liquid assets have returned to 2019 levels.
“More importantly, the labor market is likely to kick off smaller income gains in 2024 than in the prior two years,” he said. “I expect real consumer spending to continue to advance in 2024 but at a much slower pace than in 2023, when real gains probably averaged around 2.5 percent. I am projecting a 1 percent pace of increase in real terms for 2024.”
If that’s not exactly rosy, it’s at least better than constant fretting over recession — a rhetorical and analytical thread retailers and consumers could do without.
Matthew Katz, managing partner at global consulting firm SSA & Co., said: “We need a bit more time for the soft landing language to resonate before fears of recession narrative moves from the forefront. We could see a continuation of reduced consumer spending into the New Year. From a consumer psyche perspective, one difficult episode or downturn in the stock market, one difficult message, can reenergize that recession conversation.
“If we get a handful of months with positive news, that will help,” Katz said. “As the price of gas and the price of food continue to come down or level off, that eases concerns and puts more disposable dollars in consumers’ pockets.”
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