You’ve probably heard that the shortest distance between two points is a straight line. In reality, when it comes to the future path of the economy, the line is rarely straight.
We saw this last week, when a key measure of consumer inflation rose after three months of decline. This kind of volatility isn’t unusual, especially during times of geopolitical uncertainty.
With significant global challenges and opportunities greeting 2024, I expect the new year to serve as an inflection point between the post-pandemic economic recovery and a new kind of growth. And the path between past and future progress is bound to have a few curves.
So, at the start of the year, while most economists are providing their predictions, I’d like to offer some perspective. Regardless of which forecast you’re looking at, here are three reality checks on the year ahead.
The U.S. economy ended 2023 on very strong footing. Inflation was near the Federal Reserve’s 2 percent target, growth was solid, and unemployment was at a low 3.7 percent.
The bulk of the pandemic’s economic pain is behind us. The aftermath, however, still could hinder growth. Fiscal deficits grew substantially as the federal government tried to limit the pain of the pandemic, and the national debt hit a record $34 trillion in December.
And while inflation has slowed considerably, it has left a legacy of higher prices on a range of goods and services. The latest U.S. inflation read showed the Consumer Price Index at 3.4 percent for the 12-month period ending in December, up from 3.1 percent for the same period ending in November.
As prices continue to edge up, elevated interest rates are making things more expensive, too. It’s become more difficult to buy houses and cars, and more difficult for employers to grow their businesses.
Taken together, these realities mean the U.S. economy is likely to grow more slowly this year than last year.
Another reality check: Worrisome demographic trends have been building for decades and could soon reach a tipping point in parts of the world.
The world’s aging population will weigh heavily on the labor market. In some countries, an older workforce could hamper efforts to regain and maintain pre-pandemic levels of growth. Europe, China, and the United States are particularly vulnerable. Widespread retirements will mean skill shortages and the loss of institutional knowledge.
The upside is that unemployment could stay low for some time to come, even as the economy slows.
Our third reality check, rapid technological innovation, could be an unexpected boon to growth.
Artificial intelligence has the potential to push back against pandemic and demographic headwinds. Innovations in generative AI and similar technologies, if properly harnessed and directed, could unleash a global productivity boom.
Capturing the benefits of technology in a way that can nurture a workforce that thrives in the face of change will be key to U.S. growth in 2024 and beyond.
I expect 2024 to be an important turning point on a new path to growth, one shaped both by old trends long in the making and rapid-fire new developments that society has yet to harness.
For Main Street, navigating the twists and turns of change requires holding fast to the basics of what drives household, business, and economic progress—when there are more workers and when those workers become more productive.
Economic growth can be achieved under a variety of interest rate environments, financial conditions, and geopolitical circumstances. Realistically speaking, however, a growing and productive workforce is the one constant of a growing and productive economy.