Despite the likelihood of a recession in 2023, the US economy managed to right the ship by the end of last year, staving off an economic downturn thanks to federal spending and a robust labor market.
Looking ahead to 2024, the economic outlook is even more hopeful, according to Brett House, Professor of Professional Practice at Columbia Business School's Economics Division. House recently spoke to CBS Insights about the reasoning and data behind his 2024 economic outlook, and why the US seems to be outpacing its peers.
CBS: How does the United States' economic footing compare to that of the rest of the G7 countries? Can other regions offer some foreshadowing of what's to come here?
Brett House: The United States started 2024 on relatively strong economic ground compared with its industrialized-country peers and major emerging markets.
The US avoided a much-anticipated recession in 2023 and led the G7 in terms of real GDP growth, in part because of comparatively large support from federal public spending that has resulted in substantial deficits. Although monthly hiring numbers gradually declined over the course of the year, US labor markets remained robust with a very low 3.7 percent unemployment rate at the end of 2023.
Inflation trended downward from 6.5 percent year over year in December 2022 to 3.4 percent year over year in December 2023. It is anticipated that in 2024 the US will continue to grow faster than the other members of the G7 with an expansion of real GDP at around 1.2 percent year over year. Nevertheless, the US Federal Reserve is set to cut its key policy interest rates faster and further than other leading central banks over the course of 2024 since American productivity is improving at its quickest rate since 2003, which is dampening inflationary pressures.
In contrast, the Eurozone, the United Kingdom, and Canada face more muted economic growth, more persistent inflationary pressures, and slower monetary-policy easing in the year ahead. Japan stands apart, with the first signs of inflation and growth rising toward normal rates for the first time in about 30 years.
CBS: It has been noted that workers' wages have not been keeping up with rising household costs. Is this accurate? Or overstated?
House: Average earnings grew more slowly than typical household costs during 2021 and 2022, but this trend inverted in 2023. Average hourly earnings rose by 4.1 percent in 2023 compared with a 3.4 percent gain in the consumer price index, which tracks the prices of a representative basket of goods and services. This implies that average workers saw some catch-up in their earnings compared with the cost of living during 2023, but recent wage gains haven't fully compensated for price increases in the two prior years.
CBS: We are undeniably better off economically compared to 100 years ago, but what about from generation to generation? Does Gen Z have it as good as their Gen X parents? Or Boomers?
House: The US Government Accountability Office notes that “over the last 40 years, fewer Americans are making more than their parents did at the same age”. In the latest US data from the St. Louis Fed, Millennial and Gen Z households are accumulating assets less quickly than prior generations: at 34 years of age, Millennial and Gen Z wealth stood at about 70 percent and 74 percent of Gen X and Boomer households, respectively. Nevertheless, Millennials and Gen Z individuals are generally better educated and more likely to participate in the workforce than their predecessors.
Still, compared with earlier generations they face greater earning inequalities tied to educational attainment, they hold more student debt, they are less likely to own a home, and they are slower to move out on their own. Policies to address these discrepancies could emerge in the coming years as Gen X and younger generations already account for a clear majority of eligible US voters.
CBS: What is the likelihood that we see the US hit the Fed's 2 percent year over year inflation target anytime soon?
House: The Fed's inflation target is already in sight! While growth in the headline consumer price index ticked up to 3.4 percent year over year in December 2023, the personal consumption expenditures index, the Fed's preferred gauge of prices, grew by only 2.6 percent year over year in November 2023.
The PCE index captures prices faced by both urban and rural populations, whereas the CPI considers prices faced only by urban consumers, making PCE a more representative indicator of costs. Headline PCE inflation is likely to keep coming down to around 2 percent year over year by the end of 2024.
