After a lengthy struggle, the United States has finally reached economic bliss

It can be difficult to determine which battles to wage when attempting to forecast the direction of the US economy. Economists and prognosticators have a tendency to be too extreme, considering the vast amount of information and the need for attention; oftentimes, they'll either declare that the country is facing an apocalypse or that good times are imminent. For a central bank such as the Federal Reserve, which holds the responsibility of maintaining economic stability, settling on the appropriate quantity of assistance or pressure is incredibly challenging.

 This year, the challenge was evident. At the beginning of the year, most economists were concerned that the US could fall into a recession without warning, and this belief was based on unreliable evidence. Nevertheless, the US economy showed its fortitude over the course of the year, resulting in the prediction being incorrect. On the contrary, I was apprehensive that the robust economy could spark inflation, leading to the Fed having to restore its rate of interest increases.

 Throughout the course of the year, public forecasters had difficulty predicting the future, however the Fed was seemingly successful in their balancing act. Data from the present is indicative of the economy making a gentle touchdown without any sort of inflation, recession or major rise in unemployment. Jerome Powell, the Chair of the Federal Reserve, has made it clear that the chances of a rate hike in the near future are slim, even if the economy starts to pick up again.

 This is beneficial news for families in the US, as the cost of borrowing money, such as credit cards and mortgages, will reduce, as will everyday expenses. It is also a positive situation for financial markets. Shares have decreased for almost two years as bond yields have risen. But with rates becoming steady, if not dropping slightly, the returns from stock investments are on the rise. If the year 2023 was about the effort to stabilize the economy, then 2024 is about reaping the benefits of that work.

 There is no denying that there are multiple signs of a healthy economy. Inflation is a prime example, with the core consumer price index, a widely accepted measure of inflation excluding food and energy costs, showing a rise of 2.8% since June. In addition, used-car prices may start to decline, rent prices could continue to decrease, and the improvement in supply chains could lead to cheaper prices for core goods such as washing machines and clothes.

 Productivity is another signal of progress, as data gauging a worker's output per hour reached its highest level since 2003 in the third quarter of this year. The rise in hours worked may have decelerated, yet output remains stable, indicating that individuals are achieving more in less time. This surge in productivity implies that businesses can increase salaries to employees without needing to increase prices for consumers.

 The October jobs report was a letdown, showing only 150,000 jobs added and the unemployment rate rising to 3.9%. This half-percentage point increase over the past six months is concerning, as it is close to meeting the Sahm rule's threshold of an average unemployment rate of 4% over the prior three months. This three-month average currently stands at 3.8%, which is a noticeable increase from the low of 3.5% in April, but is still not high enough to indicate a recession.

 Despite the overall state of the job market, there is still some good news. Over the last three months, the average hourly wage for all employees has grown a substantial 3.2%, a figure that is in line with the Federal Reserve's desired inflation goals. Additionally, it is quite probable that the last employment report was not an accurate representation of the growth in nonfarm payrolls as there were numerous employees who were on strike and, as such, not counted as employed.

A state of equilibrium in the job sector is being maintained.

 Between 2018 and 2023, the sequence of numbers is 024681012%

 The rate of people without work is called the unemployment rate.

 Okun's Law states that there is an associated rate of unemployment in the economy.

 The monthly jobs report is used to measure the current unemployment rate, which is then compared to the rate that is predicted by the Okun's Law. This law states that changes in the rate of unemployment are associated with shifts in the economy.

 A chart generated by Andy Kiersz of Business Insider, with the data calculations done by Neil Dutta utilizing Bloomberg's information, is presented.

 At this time, I believe what we are experiencing in the labor market to be a normalization rather than a foreshadowing of further job market difficulties. To illustrate that the current situation is still in equilibrium, we can look to Okun's law, which relates shifts in the unemployment rate to economic activity. In this case, economic activity is measured by changes in the gross domestic output. We can observe that the unemployment rate is presently lower than the Okun implied rate, indicating that the rise in the unemployment rate is what we should expect given the growth of the economy, not excessively high or low.

Upsetting the Status Quo is Unadvised

 Keeping the economy in balance is the challenge that lies ahead for 2024. We can not assume that the current conditions are permanent; they may not continue to be positive.

 The main concern for our stability is that a wavering job market could potentially trigger a major downturn. Unemployment is not a linear issue; the rate does not merely go up a bit. Historical evidence shows that after a 0.5% increase, the jobless rate is likely to rise further. The current unemployment rate is above the Federal Reserve's predicted 3.8% for the end of the year, a situation that hasn't occurred since March 2022. Should the jobless rate exceed the Fed's expectation of 4.1% by the end of 2024, it is likely that a reduction in interest rates would soon follow. The Fed has not changed its idea of what a neutral economy should look like, so any further signs of a weak labor market would be a sign that the Fed over-tightened and must take action.

 Given the moderating labor market and easing inflation, the Fed has the basis to do slight adjustments to interest rates in order to maintain the outlook. The momentum the economy has experienced and the relaxing of financial conditions could mean that less cuts will be done, but the Fed can still make some alterations to its policy. It's worth noting that the timeline for the first cut is usually within the average range, as displayed in the table near this text.

 The Fed needs to be mindful of the potential risks of cutting rates; if activity is increased too much, it could lead to the reappearance of inflation.

 The indications given by investors of what might happen in the future are revealed through the shifts in stock prices, bond yields, and mortgage rates. At the present, it appears that investors anticipate a Fed easing in 2024, as mortgage rates are declining, stock prices have increased, and corporate credit spreads have become narrower. Although the slowdown in inflation is acceptable, a surge in asset prices and inflation expectations could be concerning. Fortunately, this situation has not yet been reached.

The Variations I Have Experienced

 The possibility of a tranquil 2024 is becoming increasingly possible with every new statistic released. Certainly, the economy is likely to decelerate, but this was to be expected following a powerful third quarter. It is essential not to become overly enthusiastic and to assess the bigger picture. The economy is still expanding beyond 2% which is likely enough to prevent the rate of unemployment from increasing to the point that it impacts people's wages.

 As I consider the possibilities for the next twelve months, I've revised my estimation of the probability of a Fed rate cut from 30% to 50%. Conversely, I have decreased the likelihood of additional hikes in the coming year from 50% to 30%. The potential for an expansive easing program to combat a broader economic downturn has stayed the same at 20%. These figures are subjective. Nevertheless, I don't think a powerful easing cycle is likely due to the fact that real incomes are rising, households are in a strong financial position, other central banks have already begun to ease (which could contribute to growth) and the government is implementing an expansive fiscal policy.

 Despite the potential for disruption to our financial balance, the possibility of an uneventful 2024 is becoming more of a reality as more data is made available.

 If my assumptions are true and the Federal Reserve reduces interest rates despite the economy still showing a moderate growth rate, it will be a dream-like condition for stocks. Although share prices have already increased, a few stocks have not kept pace with the larger market. If the Fed indeed cuts rates in the coming year, it could provide a lift to these underperforming stocks.

 This year has been an unpredictable journey for the economy and markets – one that has taken us from recession to no landing, and then from no landing to hard landing. It's possible to compare the economic situation to a matrix of growth and inflation, which includes deflationary bust, modest growth coupled with diminishing inflation, inflationary boom, and stagflation. Presently, it appears that there is an increasing chance of further development in the economy alongside a decrease in inflation.

 Neil Dutta, head of economics at Renaissance Macro Research, is at the helm of the organization.