There has been a confluence of events and happenings in the past few weeks that, when taken together, portend a much healthier new year in 2024 than anyone could have imagined as recently as just this past fall.
First, news about inflation has surprised everyone, as we witnessed a sharp decline in the rate of inflation in just the last couple of months of 2023. While cooling inflation was to be expected given the Fed’s tightening, both with higher interested rates and quantitative tightening, no one expected to see actual deflation in certain measures of the economy, which has played a big role in cooling inflation. But deflation is only occurring in certain types of products, such as used cars, furniture and appliances, which saw big run-ups in prices during the pandemic. Used cars in particular were a pain point for U.S. households, with pre-owned cars seeing their prices jump more than 50 percent in the first two years of the pandemic.
These recent pockets of deflation could help push the overall U.S. inflation rate closer to 2 percent, which is the level the Federal Reserve is targeting, but it is unlikely that deflation will become widespread. Deflation is a decrease in prices over time, which is usually caused when demand dries up, which means there is less demand for goods and services, and that usually happens in a time of recession. Widespread deflation can be like kryptonite for the economy, because consumers typically will then hold off on purchases, banking that goods or services will simply get cheaper if they wait. Such a deflationary spiral hit America in the Great Depression of the 1930s, leading to a decade of economic stagnation. But based on the Fed’s handling of the economy, we expect to see deflation managed to consumers’ benefit, and we do not expect it to spiral out of control. Taken together with the expectation of falling interest rates, it will serve to continue to bolster consumer sentiment.
INVESTOR CONFIDENCE
The next round of positive news is the stock markets. At press time, all three major indexes were creeping to within a couple of percentage points of all-time highs, and those gains are broad-based as evidenced by the performance of the NASDAQ and the S&P 500. This bolsters 401(k) retirement accounts, which helps foster the “wealth factor” among consumers, who translate those gains into spending.
Another factor pushing the economy in the right direction is gasoline prices. As I have said many times, upward movement in gas prices rattles consumers: That black-and-white billboard of higher costs per gallon, staring them in the face at the gas pump, has a way of unnerving consumers. At press time, gas prices had fallen 19 percent since September, hitting the lowest point of the year. Prices at the pump had fallen for 12 weeks to hit the lowest point of the year as U.S. crude oil has booked weeks of losses. Yes, gas is a very volatile commodity, and OPEC is attempting to bolster crude prices, but this is occurring against a backdrop of record U.S. production colliding with a weakening economy in China, and so far, those attempts have not gained any traction.
While numerous other metrics point to a better economy in 2024 than most had expected, space limits my ability to reflect on all of them. But one last indicator is the home resale market, as well as new home construction. Both experienced jumps at the end of 2023, with existing home sales rising in November from a 13-year low, ending a five-month decline. This increase in sales was driven by a strong gain in the South, where homes are considered more affordable. Low inventory and strong demand continued to drive up existing home prices. However, recent declines in mortgage rates and a continued improvement in inventory are expected to fuel more demand in the coming months. On the new home construction side, builder confidence has surged along with overall consumer confidence as all the arrows are pointing upward for 2024.
A year ago, virtually every economic expert was predicting a recession on the horizon, and for now, those fears have totally evaporated. Watch for a heady year in concrete production in 2024.