In baseball, a player who is unsuccessful in hitting the ball 67% of the time over their career will be a first-ballot Hall of Famer. In basketball, a player that is unsuccessful on 33% of their free-throws is a liability, and is likely not to be on the court during “crunch time.” Success in economic […]
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In baseball, a player who is unsuccessful in hitting the ball 67% of the time over their career will be a first-ballot Hall of Famer.
In basketball, a player that is unsuccessful on 33% of their free-throws is a liability, and is likely not to be on the court during “crunch time.”
Success in economic forecasting is based on whether the forecaster is better than random guesses at what is likely to happen.
I admit last year, I was wrong in predicting an economic slowdown.
I thought the Federal Reserve was going to cause a mild recession because of the stated policy of raising interest rates to cool off the inflationary pressures building up in the economy.
It turned out that the Fed raised the federal funds rate (the rate banks lend to each other) from near zero in February 2022, to 5.33% today.
Over that period, the federal funds rate increased 11 times, with four of those hikes happening in 2023.
The two most-watched measures for the impact of these market interventions are inflation and real gross domestic product (GDP) growth.
On the inflation issue, since the first quarter of 2021, quarterly inflation dropped from a peak of 9.1% in the second quarter of 2022, to a low of 1.7% in the second quarter of 2023.
There is no other way to describe this other than to say it is a remarkable success for the Fed.
Real GDP did decline by 1.6% in the first quarter of 2022, but recovered to 4.9% growth in the third quarter of 2023.
It looks like the combination of Fed policy and Biden administration fiscal policy has successfully brought down inflation without sending the economy into recession.
It’s like the Fed had a .350 batting average and made 98% of its free throws in 2023!
In retrospect, it may be that the inflation we experienced was the result of pandemic-related supply chain disruptions that eventually turned around, and not other structural problems.
2024 predictions
Eventually, the economy will have a recession, and I remain nervous about macroeconomic conditions in 2024.
Federal Reserve policy will remain the dominant force that will determine the health of the U.S. economy.
The federal funds rate has not been increased since July. This could represent the Federal Reserve’s view that the worst is over on the inflation front, and it might be time to encourage more economic activity by lowering rates in 2024.
As a political economist, I know that the Fed is not supposed to consider political factors in its rate decisions, but you must wonder if the Fed has a bias in favor of four more years of a Biden administration than a return of the Trump administration, if those are the choices in 2024.
The Trump administration frequently blurred the lines between executive branch policies and the Fed’s independence.
Institutionally, the Fed would prefer less interference, regardless of which party is in power. The Biden administration has been largely silent on Fed rate increases.
This political view is consistent with a Fed policy that would lower interest rates in 2024, which would at least not further harm Biden’s reelection efforts.
Therefore, I predict 2024 will continue to experience moderate economic growth and a continuing decline in inflation, with unemployment remaining near historic lows, and a lowering of key interest rates by midyear.
Potential headwinds
However, there are risks that could upend this positive projection.
The Ukraine-Russia war is in its second year, and since Oct. 7, we have added the Israeli-Hamas war.
Neither of these wars is good for the economy, although there are positive business impacts for defense industry companies that are supplying our “allies.”
A second major uncertainty is the 2024 presidential election. If Trump were to be reelected in November 2024, it would represent a return to chaos in the executive branch.
If Calvin Coolidge was right in saying that the “business of America is business,” a new Trump administration would take us away from that ideal, and the business of America would be, to use Trump’s words, about “retribution.”
Political retribution is bad for business and the economy.
Fred McKinney is the co-founder of BJM Solutions, an economic consulting firm. He is the emeritus director of the People’s United Center for Innovation & Entrepreneurship at Quinnipiac University.
