2023’s Economy Will Be Hard To Top, But 2024’s Just Might

(Bloomberg Opinion) — The American consumer ended 2023 with a burst of economic good cheer, relatively speaking. (Which is to say: happier than they were a few months ago, not as happy as they were a few years ago. ) Even better, they expect the good times to continue into 2024, for both themselves and the nation.

(Bloomberg Opinion) — The American consumer ended 2023 with a burst of economic good cheer, relatively speaking. (Which is to say: happier than they were a few months ago, not as happy as they were a few years ago. ) Even better, they expect the good times to continue into 2024, for both themselves and the nation.

They’re right: There is ample reason to be optimistic about the US economy. The biggest factor arguing for improved sentiment is that the Dow Jones Industrial Average and Nasdaq reached record highs in December, and the S&P 500 is on the verge of doing so. Progressives like to point out that the stock market is not the economy.

But it is a frequently updated, highly salient index of economic conditions. It’s also the case that most Americans own at least some stock — and that’s especially true of the kind of white-collar, educated workers who derive particularly large direct benefits from the low unemployment rate. Stock market performance is one clear, objective way in which President Joe Biden’s economy has performed worse than Barack Obama’s or Donald Trump’s before the pandemic.

More green next to voters’ 401(k)s will make a big difference in that regard. At any rate, upward market moves are generally in response to good news about the economy — which of course benefits more than just investors. And in this case it’s no big mystery what the news is: The rate of inflation has plummeted, especially the core personal consumption expenditure deflator that the US Federal Reserve uses as its guide for setting monetary policy.

That means expectations of lower interest rates, which have not only driven share prices up but should also help drive a more functional housing market. New starts leapt upward in the most recent data, helped in part by lower mortgage rates. Lower rates should also help address the acute lack of inventory in the housing market, which has been fairly dysfunctional for the past couple of years.

Americans love their quirky and unique 30-year fixed-rate mortgage, but it can have perverse impacts during a period of rising interest rates: Because a loan is tied to a specific home, people who bought during the long era of low rates found they often couldn’t afford to sell their house and buy a new one of equivalent price at the higher interest rates of 2022-2023. That’s an annoyance for middle-class people who need (or just want) to relocate. But it’s also a powerful disincentive to empty-nest couples to consider downsizing, and helped exacerbate a shortage of units for young families.

Falling mortgage rates will save lots of buyers some money — and boost the home equity of many others — but more to the point, they will create a more normal market, with many buyers and many sellers. Meanwhile, inflation continues to decrease. There’s a theory that voters won’t be satisfied with a falling rate of inflation, because what they really want is a falling price level.

There’s no doubt something to that. But if a falling rate of inflation is good enough to boost retirement accounts and unstick the housing market, even people upset that prices haven’t fallen may be happy. The cascading effect of the good news continues with the impact of a lower inflation rate on real wages.

A lot of Democrats have confused themselves about the situation here. Throughout Biden’s presidency, real wages have been above their pre-pandemic levels. But one major reason for that is that wages grew faster than prices for the final 12 months of Trump’s presidency — which is true even if you adjust for compositional effects.

Starting in spring 2021, prices started rising faster than wages for most workers, and did until about the mid-2023. Unsurprisingly, people weren’t happy about this. The comparison to pre-pandemic wage levels was a valid refutation of overstated doomerism about the economy, but it didn’t change the reality: Real wages were falling.

People saved up extra money during the pandemic, both because of government relief efforts and because they were spending less. Then, when the pandemic ended, they spent their extra money —pushing consumption up more rapidly than production could expand, leading to prices that rose faster than wages. Whether you want to call that inflationary episode “transitory” or not, it’s now over.

The economy is back to normal operating mode, where spending is related to earnings and earnings are rising faster than prices due to rising productivity. Rising average wages will also set the stage for some more optimistic discussion of other economic trends. The racial wage gap, for example, has been falling for several years.

That’s part of a larger trend toward equality of the wage scale that the economists David Autor, Arin Dube and Annie McGrew have documented. What they call the “unexpected compression” of wages actually began before the pandemic, as low unemployment started raising pay at the bottom faster than pay at the top. But compression really took off during and after the pandemic, when ferocious competition for workers ensured that real wages rose at the bottom even during the worst of inflation.

Nobody felt very good about this, because most people’s income was falling — it was like a parody of progressive economics, where people became more equal by becoming poorer. But the circumstances of the compression have remained in place even as inflation has receded. The US continues to be a place where it’s relatively easy to find work, and where even politically conservative small business owners who say the economy is terrible also say they are planning to add workers.

None of this is to say that 2024 will be an unambiguously great year for America. It’s a presidential election year, after all, so no matter what happens, about half the country will end up dissatisfied. When it comes to the economy, however, they should have precious little to complain about.

Elsewhere in Bloomberg Opinion: The Year There Was No Recession: Nir Kaissar and Jessica Karl There Was Good News About the Climate in 2023: David Fickling America Is Finally Losing That ‘Vibecession’ Feeling: Conor Sen For more Bloomberg Opinion, subscribe to our newsletter. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Matthew Yglesias is a columnist for Bloomberg Opinion.

A co-founder of and former columnist for Vox, he writes the Slow Boring blog and newsletter. He is author of “One Billion Americans. ” More stories like this are available on bloomberg.

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