2024 Economy Outlook: Don Davis

Davis’ 2024 Projection: A slowing economy that bypasses a recession, weakening employment, 2% gross domestic product growth and maybe a 2.5% consumer price index. If we were to get there, I think then that second half of the year allows the Fed to start cutting rates very gradually. That’s a very positive setup.

The Federal Reserve in mid-December held its key interest rate steady for the third time this year and hinted at cuts in 2024. What’s the impact of leveling inflation and these potential cuts?
The market has been rallying on this pivot from rate hikes to rate cuts really since the end of October. Their target [inflation rate] is 2%. There’s been a lot of skepticism that we would get there. Well, we’re making incredible progress, and that leveling of inflation allows the markets to get back to normal – both stocks and bonds. Bonds have had a wild ride over the last couple years. As far as consumers go, that’s where the real impact is felt. If you have inflation above that targeted 2%, everyday people feel it not only at the gas pumps, and that’s kind of a volatile way to judge inflation, but just look at the price of goods. Once we get back toward that 2% that the Fed is looking for, it’s going to be very impactful for the everyday citizen and also impactful for the markets.

What rate of inflation will we see in ‘24?
I look for a 2 handle by the end of the year, whether that’s 2.0% or 2.9%. Getting under 3% in the amount of time that they’ve been doing this, I think Chairman Powell deserves a lot of credit and the entire (Federal Open Market Committee) needs a lot of credit for that, first to admit their mistake but then to take action and get it under control. The fact that the economy is still doing fairly well is pretty remarkable.

GDP increased at an annualized pace of 4.9% in the third quarter of 2023, which almost doubled from the first part of the year and is the strongest growth in nearly two years. What does that signal?
GDP is really a component of two things: productivity and labor force growth. Well, we’ve had no labor force growth to speak of. So, really GDP has been a function of productivity and productivity has been very strong. GDP is expected to slow. Some would say that we’ve been having these rolling recessions, depending on what part of the economy you’re in. A lot of economists have been predicting a soft landing. If you put the entire economy together, we’re going to probably avoid the recession. My personal guess is that while we will weaken, we may get a light recession – two consecutive quarters of negative growth. We’ve never had a recession in this country when we’re growing jobs. Right now, we’re creating about 200,000 a month and that’s above what the market had expected at this point after all the rate increases.

The Congressional Budget Office on Dec. 15 projected real GDP growth to slow to 1.5% over 2024. Thoughts?
They’re like the Ron Hearst of economic predictions – they’re not the most reliable. But if you look at where we’ve been and that lag effect of all these rate hikes, I think the predictions are 1.5%-2% with a lot of economists, it’d be hard to argue that. If we get GDP growth at even somewhere north of 1.5% and they get inflation down at 2%, that will be a major success and still have positive job creation.

Is there a key economic indicator you’ll be watching?
Job creation is the first thing that I look at each month. If we start breaking down from that consistent level of a couple hundred thousand or more to below 100,000 and then keep kind of moving down each month, that’ll be a telltale sign of how quickly the Fed may potentially cut rates. They’re not going to cut rates until they start to see that deteriorate.

How do you anticipate this presidential election cycle impacting stocks, investments or other areas in the economy?
This particular election is going to be exceptionally important. Just the uncertainty around Trump and Biden, and then we have a very tight House and Senate. There are some that are predicting that we may see a flip in the House and the Senate. When you have that balance of power, it’s a lot better for the markets. One hundred percent of the time since 1950, year four is positive if the president is running for reelection with an average return of 11.7% for the S&P 500. That’s pretty substantial. I would find it difficult to say that we would follow up this year with another year that’s double digits, primarily because we’re looking at some economic decline.

Retail sales are continuing to rebound better than expected and consumer spending was strong in 2023. Will that continue?
The U.S. consumer is never someone you want to bet against because they typically find more money somewhere. We’re starting to see some breakdown to that as we see the amount of consumer debt build up, and as interest rates have gone so has the service on that consumer debt. It goes back to jobs. Once we see that relationship break down as far as employment and the number of people maybe being let go, that may start to hurt consumer spending. As we go into next year, I think there will be weakness in employment.

How do you anticipate artificial intelligence impacting the economy?
The stock market has been driven by, of course, seven stocks. The large tech companies are all leaders in AI – and they’re going to benefit and they’ve done exceptionally well this year stock pricewise because of that anticipated boom in AI. We’re at the top of the first inning as far as that’s concerned. Going back to GDP and productivity being a major part of that, productivity gains I think are going to be exceptionally good because of AI. Companies are utilizing AI to streamline and make their businesses more efficient and more profitable. This next decade is going to be very akin to what we saw in the early 2000s once the internet boom took over.

What’s your advice for business owners in 2024?
There’s no slam dunk here that we’re going to have a soft landing. Business owners should be very nimble, have cash and be ready for that hard landing scenario. If we skip the hard landing and we do land softly and the economy continues trucking along, they’ll have the ability with that cash to add payroll and, depending on the industry, be aggressive if need be.