Friday, Feb. 2, 2024 | 2 a.m.
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New Year’s resolutions are as fickle as rain in the Mojave Desert.
At the beginning of 2023, many smart people, including fellow economists, declared that in 2023 the economy would fall into recession. Surely the Federal Reserve could not deliver a soft landing (e.g., decreasing inflation through high interest rates while maintaining a low unemployment rate). Yet, Chair Jerome Powell and the Federal Open Market Committee (FOMC) stuck to their resolution and it worked. Between January and December, they brought headline inflation (measured by the consumer price index) from 6.3% year-over-year to 3.3%, while maintaining a historically low U.S. unemployment rate.
At UNLV’s Center for Business and Economic Research (CBER), we did not forecast nor do we currently forecast an impending recession. But we are not ones to dish out humble pie to our colleagues for simply getting it wrong. Forecasting the future is tricky business, where the forecaster’s motto is “often wrong, never in doubt.”
We have two groups whom we should thank for the economy continuing to be so robust this past year: the insatiable appetite of the American consumer and the nimbleness of American business. Remember, we started 2023 with an inflation rate well above the Fed’s 2% target and real wages were decreasing in every industry except for leisure and hospitality, as inflation exceeded nominal wage growth. Most Americans were losing purchasing power due to higher prices and, judging by the consumer sentiment surveys at the time, they knew it.
A year later, growth in real wages is occurring in almost every industry, as now nominal wage growth exceeds inflation. More Americans can afford goods like the latest $1,000 iPhone Pro Max, eating out at restaurants, and traveling to exotic places such as Las Vegas. Businesses, small and large, took note and with the supply chain issues from the past two years mostly resolved, they started offering sales on goods and services earlier and longer than they had in the past (consumers are suckers for a good deal). It was not surprising, then, to see real U.S. gross domestic product last year come in at a red-hot annualized increase of 4.9% and 3.3% in the third and fourth quarters, respectively.
As we move into the heart of 2024, here are three economic indicators we recommend keeping an eye on.
Consumer spending
Consumers have piled on a trillion dollars of credit card debt, delinquency rates on consumer loans are higher than before the pandemic, and the personal savings rate has settled at a 15-year low. Inflation isn’t increasing as fast as it once was (disinflation), but prices remain higher. Will consumers start to curb their spending this year?
Interest rates
What does the Federal Reserve’s pivot to “normalization” of interest rates look like? Its most recent summary of economic projections in December, aka the infamous dot plot, showed potentially three rate cuts this year. The market seems to be betting that at least some of those rate cuts will come in the next six months. What if the cuts happen more toward the end of the year? The Federal Reserve has made it clear they still see reducing inflation as their No. 1 goal, which means there is still work to be done.
Labor market
Powell mentioned the unemployment rate 15 times in his December remarks. There is an economic theory called the Phillip’s curve, which states that there is a tradeoff between interest rates and unemployment. So far, we have not seen credible signs of a weakening job market due to higher interest rates. The U.S. unemployment rate is at a still historic low of 3.7% and Clark County’s unemployment rate is at 5.1%, which mimics the national unemployment rate for leisure and hospitality workers. Unemployment could rise if firms are forced to choose between paying their workers and rolling over their corporate debt at higher rates.
At our annual Fall Economic Outlook event in November, CBER, along with help from colleagues at RCG Economics, put together forecasts for the U.S. economy if a recession occurred and the resulting effects on Southern Nevada. We found that under both mild and strong recession scenarios, Las Vegas is vulnerable to slowdowns that could drive unemployment to 10% or more.
CBER is not forecasting a recession and our point is not to scare you, but we feel strongly that Las Vegas cannot let the good times distract us from the mission of diversifying our economy, particularly around health care and manufacturing. That to us is a New Year’s resolution worth committing to. And, if we get it wrong, there will always be (humble) pie in 2025.
Andrew Woods is director of the UNLV Center for Business and Economic Research.
