History in the Making?

PUBLISHED JANUARY 2024

Last January, as is the annual custom at Ingram’s, we polled a small group of economists about what the U.S. economy might have in store in 2023. If their collective insight could be considered in terms of traffic-light signalization, the message would have taken on the flashing amber tones of caution ahead.

How did that work out for everyone?

• The Dow Jones Industrial Aver-age finished the year up 13.74 percent.

• The S&P shot up 24.73 percent.

• And NASDAQ? An increase of 44.52 percent.

Some cautionary environment. To be sure, inflation remained a concern, though a muted one compared to levels of 2023, but oil prices actually fell nearly 10 percent by year-end, and interest rates appear to have maxed out. As a result, a year after the caution flag was flying, it’s quite likely, area economists say, that the Fed has managed to pull off something it has never achieved before: A soft landing—significant reductions in inflation without a spike in unemployment.

At UMB Bank, CIO Eric Kelley isn’t so sure. “We are not in the soft-landing camp yet,” he said. “In the short term, the data looks like we are headed that way: Inflation is falling, unemployment is not rising. It doesn’t look like we are headed toward a recession, but a soft landing has never happened in the U.S.”

He believes a mini-recession remains possible this summer if you go by technical measures of one—consecutive quarters of declines in GDP. But if one emerges, he expects it to be mild and brief. “If it pushes the unemployment rate up, and I think it will, above 4.5 percent, it’d be a mild recession, and there’s a 60-70 percent probability that will happen.”

That’s not far off from the timing KC Mathews sees at Commerce Trust.

“Numerous recession indicators have been waving red flags since mid-2023, suggesting a recession is looming,” he said. “Famed economist Milton Friedman noted that changes in monetary policy have long and variable lags. Therefore, our base case has the U.S. economy slipping into a mild, short-lived recession in late 2024.”

It might indeed be too early to declare victory for the Fed, says Joe Haslag, a University of Missouri professor of economics. There are promising signs, but inflation is likely to remain a Fed concern for a spell. 

The most recent federal measures of it, he noted, ticked up slightly in December, so “some are starting to express concerns about the stickiness of the inflation rate in services. Goods prices seem to have mellowed or follow oil as it gyrates around. But service prices are still showing some hesitancy to move down as quickly. It’ll be bumpy, but I think by the end of the year, the Fed will sense a comfort level in the 2-3 percent range.”

That, he said, could prompt interest-rate reductions as soon as March in some views, but Haslag anticipates those moves won’t arrive until summer or early fall. “Until the Fed see the whites of inflation’s eyes on 2 percent,” he says, “I don’t think this group is compelled to lower rates too quickly.”

Mathews, too, is in the no-sudden-moves camp.

“Commerce Trust believes the Fed will continue its pause phase, holding the federal funds rate at 5.5 percent in the first half of 2024,” he said. “Due to dissipating inflation, we anticipate policymakers to deliver several rate cuts over the course of the year. The Fed has forecasted three rate cuts over the course of 2024. The risk to our forecast is the “last mile” of reducing inflation can be challenging and take time. If inflation is stickier than the Fed or the markets like, then interest rates may remain higher for longer.”

At UMB, said Kelley: “This is a big topic for us; a very big part of our world. There are some strong opinions about it, but nobody has a crystal ball” on rates, he said. “I do think inflation will grind lower, probably in some volatile fashion, and I think the Fed will be easing in the back half of the year. The forecast is 75-100 basis points lower, which is not a lot, but it’s moving into the next cycle, so I think all the parts are in place.”

The $24 trillion question, he said, referencing the nation’s total GDP, is whether the Fed can meet market expectations that rates will be cut by 1.5 percentage points this year. “We try to be relatively cautious on our forecast and fall into in the 75-100 basis-point range, and if the economy slows down, they will certainly by 150 if they have to.” But, he said, “they absolutely do not want to make the mistake of cutting too soon and re-igniting inflation.”

Another aspect that will set 2024 apart: It’s an election year for both Congress and the White House. 

Some economists will write that off to quadrennial coincidence, of no greater significance to investors than any other factor in a non-election year.

“The way we look at it, there’s short- and long-term effect” from election years, said Kelley. “There are tons of research on that impact from big national and global firms. They tell you that election outcomes don’t have identifiable impacts on the economy or markets over the long term.”

In the short-term, though, those months leading into November “cause a ton of uncertainty” in the business community, he said. And this year will be particularly interesting, especially if it produces a polarizing Biden-Trump rematch. “Polarization is bad, and we’re at the highest levels of it, the worst we’ve ever seen in the history in most of the developed world,” Kelley said. “It’s going to be an ugly cycle, but even if not, the months leading into the cycle typically are very turbulent. There’s a lot of uncertainty, and that’s hard on consumer sentiment, so the markets usually are very, very choppy the first half of the year.”

That makes it hard for businesses to commit to long-range decisions, even though most executives and business owners know that no matter the election outcomes, they’ll still have to manage around the fallout.

Mathews said Commerce is holding its breath on real estate, “particularly with commercial properties as occupancy rates continue a multi-year downward trend and the current interest-rate environment makes refinancing much more expensive.”

So where to look for the best growth prospects in 2024?

Haslag thinks artificial intelligence and companies in that space will do well, although “ultimately with AI, we’re going to have to be wise in how we use it. It creates opportunities for productivity gains.”

The broader tech sector, as well, should remain strong. “Watching stocks like Nvidia, Palantir, those AI-forward-looking looking companies, a number of them have put stakes into the hardware, the chips and coding, as well as the apps.” 

A major movement in the tech sector, he said, entails U.S. efforts to bring back into domestic settings the computer chip production that had moved off-shore, particularly to Taiwan. The looming threat from China over that island’s fate will add impetus to that trend, Haslag said, and the movement shouldn’t be contained to chip production alone.

“If we are correct in this being a slow year with a mild recession, the sectors that normally hold up much better than others are the blocking/tackling sectors: consumer staples and utilities, historically do well during contractionary times,” Kelley said. “We may see a struggle with discretionary spending, especially on the high end with goods and travel. Banks and the finance sector should do OK if yields fall and the curve comes back to its normal shape. That would be a decent tailwind for the finance sector.”

“We continue to be positive on information technology as new business models, and the necessary infrastructure to support them, will continue to take profits away from other areas of the economy,” Mathews says. “Excitement surrounding artificial intelligence and other technologies will continue for the foreseeable future.”

Health care, too, will continue to see recovery from its pandemic-era slump, he said, “and we believe industrials—particularly the defense industry sub-sector—could perform well in the near term given the current state of heightened geopolitical tension.”