Paul Mueller, The Daily Caller News Foundation | January 15, 2024
While many are cheering the “Goldilocks” economy of 2023, we should be concerned about the return of three “bears” in 2024: the Federal Reserve, geopolitical dynamics and Uncle Sam.
Given the glowing reports about the U. S. economy in 2023, one might be forgiven for thinking it was a fairy tale. Like the ideal bowl of porridge in the story of Goldilocks, the economy was neither “too hot” nor “too cold.”
Inflation fell, but not too quickly. Real wages grew, but not too much. Stock markets hit all-time highs; housing prices remained stable; long-term government borrowing rates and home mortgage rates dropped. Real GDP grew by over 3%. Unemployment remained near its historic low, even as labor force participation grew slightly from 62.4% to 62.8%.
That all sounds like an economic fairy tale. But the story of Goldilocks doesn’t end with everything being “just right.” There are three bears who return to the house and are less than thrilled with Goldilocks’ intrusion.
The largest potential bear for the economy in 2024 is the Federal Reserve. Although Fed Chair Jerome Powell has been thanking his lucky stars that nothing seems to be breaking in the economy despite historic interest rate hikes, we are not out of the woods.
The Fed must navigate two potential problems: monetary overtightening and long-term inflationary pressure. Avoiding these problems requires threading a monetary policy needle.
One the one hand, as my colleagues have repeatedly noted, the Fed’s measures of inflation likely understate how much inflation has fallen because they rely on lagging data. That means they may keep monetary policy tighter than they should for longer than they should. If that happens, economic contraction could crop up unexpectedly and severely.
On the other hand, the Federal Reserve continues to inject about $20 billion a month into the economy as it pays interest on bank reserves and bond reverse repurchase agreements. That provides extra liquidity support and inflationary pressure despite the higher interest rate target. Even more important, however, is the fact that the U.S. government continues to issue and rollover massive quantities of debt.
Although the 10-year and 30-year treasury rates have retreated from their recent highs, they remain high enough to increase debt servicing costs to over $1.3 trillion annually once most existing U. S. debt rolls over. This, in turn, can fuel larger deficits, greater borrowing and thereby greater pressure on the Fed to maintain or expand its balance sheet to buy federal debt with newly created money.
More immediately, the effects of higher interest rates are still reverberating in the economy. Distress in commercial real estate continues to grow and consumer credit card debt appears to be on an unsustainable trajectory. Both issues will put downward pressure, potentially significant downward pressure, on consumption and investment in 2024.
A second potential bear in 2024 is geopolitics. The conflict between Ukraine and Russia continues to draw significant resources in direct aid and disrupts certain commodity markets. Conflict in the Middle East has begun increasing the costs of shipping but could create massive problems for energy markets if the conflict broadens to include Iran, Iraq and Saudi Arabia.
No doubt the costs of shipping would rise much more dramatically should conflict escalate that broadly.
And, of course, there are other risks and problems related to U.S. trade protections dampening global trade as well as economic woes in China spreading throughout the global economy. The international crusade to implement ESG objectives, especially regarding renewable energy, will continue to weigh on economies by creating inefficiencies.
A third bear to worry about in 2024 is Uncle Sam. The U.S. government has deeply insinuated itself in the economy.
From billions of dollars in annual regulatory compliance costs to anti-competitive regulations and laws to massively distortionary subsidies, U.S. government policy can create major problems for the economy.
Sometimes it makes doing business more costly and less efficient. Sometimes it subsidizes unproductive companies and industries. Sometimes it provides artificial stimulus that leads to economic withdrawal when the stimulus ends; not to mention how tax policy, particularly high tax rates, discourages investment and productivity.
All this should give us cause for concern for the economic outlook in 2024. Perhaps Goldilocks will escape from the three bears just like in the fairy tale.
But then again, we do not live in a fairy tale and certainly should not take such a happy ending for granted.
Paul Mueller, PhD, is a Senior Research Fellow at the American Institute for Economic Research.
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