2024 Forecast – The Economy
How many years must a mountain exist,
Before it is washed to the sea?
Yes, and how many years can some people exist,
Before they’re allowed to be free?
Yes, and how many times must a man turn his head,
And pretend that he just doesn’t see?
The answer my friend, is blowin’ in the wind.
The answer is blowin’ in the wind”
Blowing in the Wind – Bob Dylan (1962) – Famous cover by Peter, Paul and Mary
…..
Bob Dylan was right. The answers are indeed blowing in the wind. Or, as Winston Churchill once declared, “the future is unknowable”. Nonetheless, we want to know what the future holds before the hand of God shows it to us. To that end, here are my forecasts for the economy in 2024, including a peek at 2025.
Economy: 70% of GDP comes from the consumer. Businesses are cutting back right now. They are slowing capital expenditures and hiring and spending in many cases. But, the consumer is not cutting back. At least not yet.
If people have a job, cash in the bank, and their net worth is going up, they will go on trips and eat out and generally spend money. Much of the cash they got from the pandemic is still there. Total cash in checking accounts is still 3 times what it was before the pandemic. And unemployment is still below 4% so there is no problem getting a job. The value of the average consumer’s two major assets, their home and their stock market invested 401(k), is as high as it has ever been. I don’t believe that consumers will cut back until one of these three starts to falter. At the moment, none of them are.
That said, things are definitely slowing down. The consumer is spending through that Covid cash and it will eventually run out. Hiring is slowing down and getting a job is not as easy as it was a year ago. And the value of homes and stocks seems to have topped out at least for the moment. When one or more of these three things turns down, people may start holding back more than they are at present.
But for the moment, I think the economy keeps powering forward, albeit at a slower pace. Last Spring, I went against the consensus that a recession was coming for this same reason. (when a counter narrative prediction is correct, I like to crow a little) I spend time in three very different states, as most of you know. And I don’t “feel” a recession. Having spent 25 years in the retail car business, I could walk on the showroom and feel when business was slowing or picking up. I don’t feel a decline yet. Just a slowdown in growth.
The Federal Reserve and the Treasury: Another factor in this is the Federal government. They have powerful tools to stoke or slow down an economy. Conventional wisdom is that the Fed is “independent” and makes decisions without any influence from politics or politicians.
Poppycock.
I was Chairman of the subcommittee in Congress responsible for oversight of the Fed and Treasury. Then Fed Chair Ben Bernanke would often call me up concerned that Congress didn’t approve of his actions. In 1972, Fed Chairman Arthur Burns met with President Richard Nixon and agreed to lower interest rates to stoke the economy prior to Nixon’s reelection. Nixon won 49 states. Inflation was 2% in 1972. By the end of 1973 it was 8%. In 1974 the country was in recession and inflation was 12%. The Fed exists because Congress created it and Congress sets the rules by which it operates. Congress can change those. Federal Reserve Governors are appointed by the president with confirmation by the Senate. So, those bodies can change the makeup of the board. The Fed knows all of this and pays attention to what is happening politically.
A majority of the voting members of the current board of the Fed are Biden appointees. These appointees are all leftists and some of them are not even economists but rather labor, climate, or social activists. They have made it clear that they see the Fed not as a purely academic organization to ensure a stable economy, but a tool to achieve climate, social, DEI and other leftist goals. They cannot achieve those goals with a Republican president. So, they want to do what they can to keep the economy humming at least through the election to help Joe Biden. Presidents do not get reelected when the economy is in recession.
Chairman Powell, who was originally appointed by Trump, is probably not enamored with the concept of a second Trump term since candidate Trump has said he would fire him if elected.
You are already seeing the Fed and Treasury adjust policy to favor a hot economy, even at the risk of restoking inflation. They have signaled they will lower interest rates in 2024, just as Burns did in 1972. They are talking now adding liquidity to the economy by not reducing the Fed balance sheet as much as they have been recently. They may also add liquidity and increase the ability of banks to lend through several obtuse programs they have whose explanation is outside the scope of these missives. The deficit now expected to exceed $2T this year, is pumping money into the economy. Treasury is changing the makeup of Treasury debt issuance in an unprecedented manner to make sure we don’t have a debt crisis before November.
The bottom line here is that the Treasury and the Federal Reserve are going to use every tool in their toolbox to make certain that the economy does not go into recession before November in order to help Biden’s reelection. Former Fed members have been explicit about this.
What’s the matter with that, you say? I want the economy to stay positive. Well, they may bring inflation back if they throw too much deficit and liquidity at the economy. They also may set up so much debt ($36T by this time next year) that Treasury will have a hard time selling it without printing more money.
The Biden appointees on the Fed and elsewhere in the administration, are believers in the relatively new economic theory called Modern Monetary Theory (MMT). MMT did not exist when I studied economics at UCLA in the early 1970s. Different from the Keynesian and Austrian theories, which are the other two primary schools of thought, MMT believes that you can make an economy successful by printing money continually. Since, that is what the world did during Covid and the economy is still going well, they believe they have been proven right.
I am not so sure. If they do too much here to help Biden, they may be setting up for a big increase in inflation, which is what happened after Arthur Burns did the same thing in 1972. If inflation returns, they can let it run or try and tamp it down. Depending on the response, we could have inflation, recession or both in 2025 or after.
Conclusion: Because people have jobs, cash and assets and the government is going to take steps to keep the economy humming, I think we may have reduced growth but no recession prior to November 2024. After that, however, we will likely pay the price for this profligacy. Exactly what that price is (decline or inflation or both) and when it happens and what triggers it – well, that answer is blowin’ in the wind.
I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free