Fasten your seatbelt and enjoy the ride.
Like air travelers preparing for expected turbulence, business owners are also preparing for a challenging operating environment in 2024. On the upside, the economy will continue to grow, albeit at a slower pace, in the coming months. Consumers and businesses alike are feeling quite optimistic. Unemployment rate remains low. Capital investment is proceeding at a healthy pace. And most importantly, the housing market is booming.
However, pouring cold water on people during good times is a major negative factor that no one can control. The rise in interest rates set by the Federal Reserve to curb inflation is putting a damper on business activity. Economists have taken note of this and are lowering their forecasts for the next 12 months.
“We expect real GDP (adjusted for inflation) to grow 1.4% in 2024,” said Bernard Jarosz Jr., assistant director and economist at Moody’s Analytics.
This is slower than the 2.1% increase expected at the final count in 2023 and below the 2% to 3% that is considered representative of normal business growth.
A slowdown in commercial activity will impact revenues. Moody’s Analytics predicts that corporate profits will decline by 4.5% in 2023, with a modest recovery of 0.3% in 2024.
fight against inflation
Reports from the field support economists’ views.
“Our members are experiencing an economic downturn, primarily due to the impact of rising interest rates,” said the executive director of the Manufacturers Association, a Pennsylvania-based regional employer association with more than 370 member companies. , says Tom Parisin.
While businesses understand the need for higher interest rates, they hope for early relief.
“If inflation doesn’t continue to fall, we’re going to have to raise interest rates further, and that’s going to be a big problem,” Parisin said.
So are the Fed’s efforts paying off? Here’s some good news and a sunny forecast. Moody’s Analytics expects year-on-year consumer price inflation to average 3.2% in 2023, down from more than 6% a year ago. Furthermore, this number should continue to fall until it reaches the Fed’s target rate of 2% in late 2024.
In fact, Moody’s Analytics expects the Fed to begin cutting interest rates around June 2024, but at a slower pace than previously expected, as inflation continues to persist and the labor market continues to tighten. . Rate cuts are expected to be approximately 25 basis points (bp) per quarter over the next few years until the federal funds rate reaches 2.75% by the fourth quarter of 2026 and 2.5% in 2027.
It feels good
The national mood is a powerful driver of the economy. And here’s the good news.
“Consumer confidence is trending upwards and I think the prospects for improvement next year are good,” said Scott Hoyt, senior director of consumer economics at Moody’s Analytics. “As the economy continues to grow and gas prices stabilize, things should normalize.”
One of the main drivers of consumer confidence is a healthy job market.
“The unemployment rate is very low, hovering between 3.5 percent and 3.8 percent for some time,” Hoyt said.
The situation would ease if the Federal Reserve’s interest rate hikes slowed job growth.
“We believe the unemployment rate is on a slight upward trend, reaching approximately 3.9% in 2023 and approximately 4.2% in 2024.”
Many economists see an unemployment rate of 3.5% to 4.5% as the “sweet spot” that balances wage growth with the risk of recession.
Low unemployment may make people happier, but it also poses two practical challenges for employers. The first is that wages need to be raised to attract enough workers.
“Wage and salary income growth is strong, driven by a tight labor market,” Hoyt said. “We expect growth to be just over 5% in both 2023 and 2024.”In 2022, he said, growth was just over 8%.
Confirming economists’ estimates, Parisin said members had to increase their remuneration to maintain competitiveness among themselves and other sectors of the economy. The group’s entry-level hourly wages will increase by 8% to 10% in both 2022 and 2023, well above the historical average of 2.5% to 3.0%.
Problem number two is the lack of workers. If we are unable to hire sufficient personnel, particularly skilled personnel, our revenues may be affected. Two issues driving the labor shortage are the retirement of baby boomers and the reorientation of many people’s life goals post-pandemic.
“The changing demographics of the U.S. often mean there aren’t enough workers in manufacturing to meet demand,” Parisin said. “That won’t change.”
The situation is a bit more nuanced as the recent economic slowdown has slowed hiring.
“The labor market is still tight, but it’s not as bad as it was a few years ago,” said Bill Connery, president of his consulting firm in Oregon. “There are still more job openings than unemployed people, but the difference is not that large and we are not seeing the quiet resignations that we had before.”
Employers don’t like raising wages, but capping salaries takes a backseat to the more pressing concern of preventing the loss of valuable talent.
“The big question now is not who can pay the most for entry-level or skilled work, but what can we do to keep these people in our company,” Parisin said. . “U.S. manufacturing has continued to hire significantly over the past year, with relatively few layoffs, indicating that companies are hoarding talent.”
Employers are successfully adjusting their operations in the areas of workplace flexibility, benefits and culture change.
housing market
Given the generally upbeat consumer sentiment, the outlook for the housing sector, a key driver of the overall economy, is positive.
“New home sales are trending at the high end of the range established over the decade before the pandemic,” Jarosz said. “One of the reasons, he said, is that a lack of existing inventory is causing buyers to consider new homes. The construction industry is stepping in to fill that gap. Housing starts are higher than expected.”
The construction of new homes is driven by the cold hard fact that there are not enough existing homes to meet demand.
“The 3.1 months’ supply of existing homes is still significantly lower than the 4-6 months’ worth of inventory that would constitute a balanced housing market,” Jarosz said.
Due to strong demand, the median price of existing homes rose by 10.3% in 2022 and 0.6% in 2023. A 1.1% revision is expected in 2024.
The scarcity can be easily explained by looking at the rise in mortgage interest rates. Ultra-low interest rates on existing mortgages provide a strong financial incentive for existing homeowners to keep their homes.
“Today’s homeowners were refinancing their investments at 3% or 4%,” Connally said. “To replace what they had with a better home, they would have to get out of those mortgages and take out a new mortgage at 7%. I think this trend will continue for another year, but renovations I think it’s going to do pretty well, but it’s probably going to be funded by a home equity loan or a second mortgage.”
management confidence
The combination of three challenges – high interest rates, an inflationary environment, and rising wages for workers – would worsen business confidence in normal times. There are also other threats to business health, such as rising energy costs resulting from the Russia-Ukraine war and a strong U.S. dollar that hampers export activity.
Despite this, companies do not appear to be planning any major adjustments to their operations, in contrast to their cautious stance a year ago.
“Members have tempered their expectations for the future, but they are still feeling a little more positive,” Parisin said. “One reason is that we seem to have avoided the recession that many expected.”
Moody’s Analytics predicts a soft landing thanks to labor market resilience and consumer confidence, and believes the country can avoid recession in 2024.
Another factor contributing to optimism is that the supply chain picture has recently brightened.
“The perception of the risks of doing business in China is definitely changing,” Parisin said. “As a result, supply chains have been reorganized to countries such as Vietnam, the Philippines, India, Mexico and the United States. The jury is still out on which countries will benefit the most.”
In fact, many companies take action based on good feelings.
“The commercial sector looks to me to be very strong,” Connally said. “We are surprised that capital spending is at a healthy level given the current level of interest rates.”
Connerly said manufacturing facilities appear to be the biggest gainers in nonresidential construction, with new semiconductor facilities particularly benefiting from the CHIPS Act. Despite low vacancy rates in city centers, office construction in the suburbs is surprisingly strong. The same goes for suburban neighborhood strip centers, which have been ignored for too long because of fears that Amazon will take over all retail.
Connally cites three factors supporting equipment purchases. The first is the CHIPS Act and the construction of semiconductor facilities. The second is automation, which is being introduced by companies that are concerned about hiring human resources. And third is the trend of reshoring by companies seeking to shorten their supply chains.
However, companies seeking to borrow money to facilitate capital investment should prepare for a tougher negotiating environment.
“The banking sector is shrinking and lenders are becoming more risk averse,” said Anirban Basu, chairman and CEO of Sage Policy Group. “As a result, developers are finding it more difficult to obtain financing.”
What has fueled concerns among financial institutions is the recent spate of loan delinquencies and bankruptcies. Banks are reviewing their portfolios and considering where to tighten. Companies with cheap pre-pandemic loans will see their profits take a hit if they have to refinance at 6% to 7%.
keep watch
In the first months of 2024, economists are advising businesses to keep an eye on some key statistics to get an idea of how the year will turn out. among them:
“If core-disinflation progress stalls, it is likely that the Fed will keep interest rates at current levels for a longer period of time than currently envisioned,” Jarosz said.
“Total employment numbers in the country are a good measure of where we are,” Connally said. “Also, an increase in first-time claims for unemployment insurance could portend an economic slowdown.”
“A reversal in short-term interest rates exceeding long-term interest rates could be a harbinger of an upcoming economic slowdown,” Connally said.
Regardless of the state of the tea leaves, companies will generally face a tough business environment in 2024. This will face a more challenging operating environment, characterized by a tight labor market and reluctant financiers.
“Next year, we will face uncertainties about inflation and interest rates, labor shortages, rising energy costs, a slowing Chinese economy, and the recurring threat of a federal government shutdown,” Parisin said. “There are a lot of spinning plates in the air, and some might fall and break.”