The US avoided a recession in 2023. What’s the outlook for 2024?

Next year is packed with potential shifts in the economy but many economists and investment analysts expect that the country will likely avoid a recession in 2024 even as growth slows in the first half of the year.

States Newsroom talked to economists about their expectations for some key metrics as well as their concerns about what could change their outlook.

The job market will remain strong but not as hot as 2023

The unemployment rate has remained below 4% for nearly two years, with the unemployment rate falling to 3.7% in November. But hiring has cooled off from the start of the year and retail employment dropped by nearly 40,000 jobs in the most recent jobs report, which leaves the question: How stable will the labor market be in 2024?

Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, a New York-based think tank, said that although there has been a slowdown in the hiring rate, there have not been many layoffs, which bodes well for next year if the Federal Reserve does not “overshoot” in its efforts to slow the economy. The Fed has paused its campaign of raising interest rates, which it began in March 2022, and economists expect the central bank will hold rates steady when it meets Dec. 12-13.

“Imagine the unemployed as a pool of water. Instead of more unemployed people going in, it’s just draining a little less. That’s a different kind of dynamic,” he said. “We normally are used to, in a slow labor market, hires essentially just stop and layoffs increase. Some people pointed out that a lot of the change in employment has happened among younger people. It’s not been a broad-based slowdown in 25 to 54 year-olds.”

Mark Zandi, chief economist of Moody’s Analytics, said he thinks the labor market for 2024 will remain stable and that job growth will be resilient but slow.

“I think 2024 should be an OK year for workers — still plenty of jobs and low unemployment and while wage growth will moderate, it should remain strong enough to outpace inflation,” he said.

According to the Bureau of Labor Statistics in November wages rose 4% over the past year, compared to inflation which has been easing with November’s report showing overall prices rising 3.1% over 12 months, and down from 3.2% in October.

Jesse Rothstein, professor of public policy and economics at the University of California Berkeley, said the strength of the labor market partly depends on how successful the Fed’s interest rate policies are.

“If inflation is coming down and unemployment isn’t going up, and they can continue this tight roadblock, I think we’ll see the economy cooling off a bit and wages continuing to increase, to catch up to the inflation that we saw over the last couple of years, but not dramatically outpace that,” Rothstein said. “ … If they’re not successful, the risk is that they overtighten and tip us over into a recession, but thus far there’s no sign that that’s what’s going on.”

Workers will have the power to keep organizing 

Workers in retail, auto-manufacturing, media, and shipping have made news through their labor organizing this year, particularly during what was dubbed the “hot labor summer,” when thousands of workers went on strike or heated up contract negotiations with threats to strike. The tight labor market and greater profits in some industries gave workers the power to demand better working conditions, higher wages, and contracts that were more inclusive of lower-paid workers, and that’s not expected to change in the coming year.

For workers to lose significant leverage in their fights for safer workplaces and higher wages the unemployment rate would have to rise significantly, Konczal said. Organizers will also still enjoy the advantage of a very pro-union National Labor Relations Board, he said.

“When I think more about the background conditions for which workers can exercise some power, I think the issue is less like 3.9% versus 3.6% unemployment, but whether or not the unemployment rate is in the threes or in the fives or sixes or sevens,” he said. “The labor market as a whole is still going to be a strong input to the resurgent labor campaigns.”

He does have some concerns about whether the service sector is going to face headwinds in its workers’ efforts to organize unions as employment starts to slow for these jobs.

“Then again, if demand remains robust and workers do have an edge, I think they will still have the opportunity to push further,” he added.

The housing market will continue to be a challenge 

Federal Reserve policy changes and pent-up demand for homes will result in an even more competitive housing market in many states, and continuing challenges for people seeking affordable homes and rentals. However, some U.S. housing markets, particularly in the Sun Belt, will see housing prices stabilize. Prices will increase, but less quickly than in the past, as they come down from the unsustainable growth they experienced earlier in the pandemic.

Selma Hepp, chief economist for CoreLogic, said, “This year when mortgage rates were slightly below 6%, we had quite a bit of surge in demand, so that’s telling me there’s quite a bit of pent-up demand out there but people are sitting on the sidelines and waiting out for mortgage rates to fall.”

She said baby boomers and first-time homebuyers are the biggest competitors in the housing market right now. With mortgage rates coming down slightly, first-time homebuyers have a higher share of the recent mortgage application growth, she said. Those buyers leaving the rental market will, in turn, affect rental prices.

Hepp said that while rents will continue to rise in 2024, they won’t shoot up as they have in the past few years and will begin to moderate in price.

“Historically, rents are up on a 3% year over year basis and I think what’s what we’re going to revert back to, the reason being because folks who are priced out of the market for purchase are going to bring in renters or remaining renters because they’re not ready to buy or there isn’t inventory out there,” she said.

Zandi said that he doesn’t think the housing market will become affordable for many of the Americans currently priced out in the next year.

“I think we need to see some modest price declines but that’s going to take some time because all those people who have 3.5% mortgages are going to be very reluctant to move. They’re only going to move when they have to divorce, death, children, or a job change and that could take some time,” he said. “It’s not that I think the worst is at hand in terms of home sales and affordability, but I don’t see the market becoming affordable to most Americans any time soon, certainly not in 2024.”

The Midwest will also continue to see some increased housing demand because of the federal government’s investment in semiconductor manufacturing, Hepp said.

Consumer spending will ‘push the economy forward’

Konczal and Zandi said they aren’t concerned that there will be enough of a significant change in consumer spending to hurt the economy in 2024, and that so far, they are encouraged by what they see. Core prices, which excludes food prices and energy, rose 0.3% in November, up slightly from 0.2% in October, keeping the increase for the year at 4%. But neither Konczal or Zandi see this as cause for alarm.

“In aggregate, there’s still a lot of strong savings and strong spending,” Konczal said. “Obviously for many people, too many people, [savings] and other things are a real concern. But when we’re looking at the economy as a whole, it does seem like the spending is remaining quite strong and financial conditions haven’t deteriorated either. … I think there’s every reason to assume that it will continue, especially if the Fed is willing to take yes for an answer with the fact that they brought down inflation.”

Despite higher housing prices, the financial health of many Americans has improved, Zandi said.

“People are still a lot wealthier than they were before the pandemic hit and in the high-income households, low-income households, folks in the top two-thirds of the distribution of income, still have a lot of extra savings they built up during the pandemic that they appear willing to use when they need to to maintain their purchasing power,” he said. “I think that the consumers are not going to spend with abandon and that’s good because that would be the fodder for inflation and more rate hikes. But I think (they’ll) just do their part and continue to push the economy forward.”

What could go wrong?

Economists said that there is potential for economic gloom, depending on the political outcomes next year. Although the general election is about a year away and the numbers could change significantly between then and now, some polls have shown President Joe Biden and former President Donald Trump running neck-and-neck. The political and social upheaval that close results could bring, could also spell economic turmoil in 2024.

“It feels like it’s going to be very close and therefore the potential for it being contested is very high and there’s no upside to that,” Zandi said. “It’s just a matter of how much downside there will be, how much social unrest and violence there will be. Hopefully we have none … But that’s certainly something to watch for sure. It is a risk to my optimism about the economy in 2024.”

He said that some of these worst-case scenarios could impact the stock and bond markets.

“A close and contested election could result in social unrest that would manifest most quickly and significantly in the stock and bond markets. Given how fragile consumer and business confidence already is, this could upend it, causing consumer spending and business investment to falter, and a recession ensue,” he said.

Rothstein, the Berkeley professor, said a repeat of a candidate refusing to accept their loss, as Trump and his supporters did in 2020, could be a major issue for the country, and although the economy isn’t his first concern when assessing the potential damage, it could pose a “big problem” for financial markets.

In addition to worries about the economic impact of the presidential election, economists are keeping their eye on the risk of a government shutdown. Although it was averted this year with approval of a stopgap spending bill, Congress is staring down deadlines in January and February to work together on spending bills to avoid a shutdown.

“I think a government shutdown is always a threat to the economy,” Rothstein said. “If it’s shut down for more than a couple of days, you end up with huge impacts that ripple through the economy and it may cause a recession. Even if it doesn’t cause a recession, it definitely makes our economy more fragile and poorer. So I think we have to hope that the signs that we’ve avoided a shutdown so far will continue.”