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The U.S. economy performed better than expected in 2023. A 2024 preview

ROB SCHMITZ, HOST:

The U.S. economy did better than expected in 2023. So what's ahead in the new year? Will the economy continue to bubble like freshly popped champagne, or will we suffer a hangover from stubborn inflation and high interest rates? We're only a few hours into the new year, but NPR's Scott Horsley has been talking with forecasters about what they see on the horizon, and he joins us now. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi. Good to be with you.

SCHMITZ: So, Scott, what is the outlook for this year?

HORSLEY: Well, Rob, we should start with the caveat that most of the predictions made a year ago at this time turned out to be wrong.

SCHMITZ: Aha.

HORSLEY: So take this with a grain of salt.

SCHMITZ: OK.

HORSLEY: In general, though, economic forecasters expect some relative calm in the next 12 months. The economy is expected to grow a little bit more slowly. Unemployment is expected to tick up a little bit from its very low level, but not much. And both inflation and interest rates are expected to moderate this coming year. The Federal Reserve has signaled that it's probably done raising interest rates and will likely start cutting rates in 2024.

SCHMITZ: The prospect of lower rates has already given a lift to the stock market. What does it mean for the rest of the economy?

HORSLEY: It would certainly help sensitive sectors like manufacturing, which was in a slump for most of last year. Factory managers were already looking for a rebound in 2024. And Tim Fiore, who does a monthly survey of factory managers for the Institute for Supply Management, says lower borrowing costs would likely make that rebound stronger.

TIM FIORE: It looks like the worst of the manufacturing difficulties are likely behind us or soon to be behind us. The first half of 2024 will be better than the second half of 2023.

SCHMITZ: Wow. So factories are feeling pretty bullish about 2024. What about the housing market?

HORSLEY: You know, housing is another sector that really struggled last year with rising interest rates. A lot of would-be buyers were priced out of the market, and...

SCHMITZ: Yeah.

HORSLEY: ...A lot of would-be sellers who had locked in cheaper mortgages felt like they couldn't afford to move. But we have started to see some relief in mortgage rates. You know, they dropped from nearly 8% in October to just over 6.5% last week. And the National Association of Realtors think rates will come down a little bit more this spring. They're probably not going back to the ultralow 3% range we saw two or three years ago. But Ryan McLaughlin, who heads an association of realtors in Northern Virginia, thinks we will start to see a pickup in home sales this year.

RYAN MCLAUGHLIN: The initial sort of sticker shock of the quick rise in interest rates over the past year or so caused home buyers to sort of pause and say, wait, you know, this is too much. But consumers are starting to get more comfortable with where the rates are going to be. At some point, life happens, and people are going to move.

HORSLEY: The shortage of homes for sale has also given a lift to home builders, who are keeping busy, and that's been good because we need to build a lot more housing in this country.

SCHMITZ: So, Scott, I hate to say this given how the predictions for 2023 were all wrong, but is it safe to say that we've dodged a recession?

HORSLEY: Well, it's safe to say we didn't have a recession in 2023.

SCHMITZ: Yeah.

HORSLEY: It's harder to say that with confidence about 2024. But, you know, a growing number of forecasters do think the Fed may succeed in getting inflation under control without sending the economy into a ditch. The stock market is acting like we've already achieved that so-called soft landing. Joe Davis, who's global chief economist at Vanguard, is not so sure. He thinks the fallout from last year's high interest rates is still making its way through the economy and that 2024 could still be a bumpy ride.

JOE DAVIS: Markets have surprised me - how strong they are. If you're a long-term investor, it's - brace for some volatility. I think the market's naive.

HORSLEY: You know, stocks are priced for a very rosy 2024, but there are always potential pitfalls out there. The job market could turn out to be weaker than we expect. Consumer spending could take a hit. Obviously, there's no shortage of geopolitical uncertainty right now.

SCHMITZ: Right.

HORSLEY: So economic forecasts are kind of like New Year's resolutions - probably best not to put too much faith in them.

SCHMITZ: That's NPR's Scott Horsley. Thanks, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Rob Schmitz is NPR's international correspondent based in Berlin, where he covers the human stories of a vast region reckoning with its past while it tries to guide the world toward a brighter future. From his base in the heart of Europe, Schmitz has covered Germany's levelheaded management of the COVID-19 pandemic, the rise of right-wing nationalist politics in Poland and creeping Chinese government influence inside the Czech Republic.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.