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Economist Hugh Johnson predicts a slowing economy in 2024, lower inflation and Fed interest rate cuts

Economist Hugh Johnson
Jim Levulis
Economist Hugh Johnson

Since 2024 is a presidential election year, Americans’ pocketbooks will likely remain a top issue. So we checked in with economist Hugh Johnson for his annual outlook and to see if he thinks the Federal Reserve can pull off a so-called “soft landing” – slowing the economy enough to tame inflation without sending it into a damaging recession.

Johnson: A lot of us, including myself had been sort of wrong or premature in calling for, let's call it either a soft landing or a hard landing really, in the US economy. We had started the year 2023, saying that we think the economy is going to have a hard landing, or it's going to have a contraction. Well, that didn't happen in 2023. Not only did that not happen, but the economy was much stronger. So we're starting 2024 really on the same note. The expectation, the pretty widespread expectation is that the economy is in the process of slowing, or it's slowed in the fourth quarter. The third quarter was very, very strong, this is a strong number of 4.9%. Fourth quarter looks like it's coming down to 1.2%. And the general expectation and mine as well, is we're going to have about 1%, maybe a little bit less in the first two, maybe three quarters of 2024. So a slower economy. But the good news is, is that once we get through the first two quarters of somewhat sluggish growth, the expectation, mine as well, is that we're going to have I don't want to call it an acceleration, but certainly a pickup in economic activity in the third and fourth quarter and as we move into 2025. So a little bit softness at the start, and then we'll start to get, not an acceleration as I say, but some pickup in economic activity as we move into later 2024 and 2025. So I think it'll go down as a pretty good year, but certainly not a great year.

WAMC's Jim Levulis: You alluded to it there, has the Fed, in your mind, pulled off this soft landing?

Great question. I don't think they know and I don't think I know, but I would say, as we look at the numbers right now, and I mean, we look at all the numbers, the employment numbers are clearly slowing. There's no question that the inflation numbers are coming down. It looks to me as though the economy will have positive growth, but soft growth, slow growth in the first couple of quarters. That means the Federal Reserve will maybe be successful in pulling it off, that the economy will land softly, it will not have a hard landing, we will not have a contraction in the economy. But it's too soon to say that with a lot of confidence, because there still are, some of these technical indicators that we watch, I watch it, we all watch them pretty carefully, leading indicators for the economy, which have been down 22 successive or consecutive months, that tell us that don't get too confident yet. Let's see how it plays out in the first couple of quarters of 2024 before we declare victory and I think people's the Federal Reserve will tell you the same thing. They're not declaring victory quite yet.

Sticking with the Fed, how do you expect the Federal Reserve to approach what's expected to be a reduction in its main interest rate in 2024? When might we see that first reduction, in your mind?

The expectation right now, based on what we've heard from the Fed is that they'll reduce interest rates three times in 2024. That probably means one time in the first quarter, maybe March, one time in the second quarter, maybe one time in the third or fourth quarter. But the three reductions in 2024, and let's not forget that they're talking about additional reductions, four reductions in 2025. So I think they'll get going sometime in the second, maybe it's going to be first, second quarter of 2024. And we'll have three cuts in 2024. That's what it looks like now. And I would add importantly that I think that would be a very rational response to the fact that the economy will be slowing in the first couple of quarters. And secondly, and most importantly, the rate of inflation will continue to come down. In other words, they'll be looking at much lower rates of inflation, and pretty close to target rates of inflation. Their target, of course, is a 2% inflation rate.

The Federal Reserve's preferred measure of inflation fell to 2.6% in November from a peak of 7.1% in 2022. So certainly getting pretty close to that 2% target.

We're making a lot of progress and you have to give them congratulations or a commendation for the work that they've done. The personal consumption expenditure price index is the one to watch. Most do not expect that they're going to get to or even below the 2% level which is their target into 2024. I tend to differ from the consensus on that point. And I think that they'll not only get to the 2% target, but I think as we move to the latter part of 2024, there's a very strong chance that they're going to get below that target. And the second thing I would say is, is there's a chance, some of the leading indicators that I look at leading indicators of inflation, say that inflation may stabilize and start to maybe turn up a little bit, when we get into 2025. That's the way economic recoveries ordinarily unfold, you get a little bit of upward pressure on prices. So don't be surprised if we see a little bit of upward pressure on inflation, but not until 2025. 2024 looks like a safe bet for lower inflation.

Wall Street had a solid 2023. The S&P 500 up roughly 25%, the NASDAQ gained more than 40%. Is that growth expected to continue through 2024?

Wall Street was the big surprise, I think, in 2023. And you're right. Nobody expected anything like this, most of us were talking single digit gains. The big reason of course for the gains was because of the so called, we call them now The Magnificent Seven or seven companies that we’re primarily focused on trying to change their businesses and take advantage of the progress or the unfolding progress in artificial intelligence. Those are the companies that did extraordinarily well, I think the average gain for those companies in particular, was close to 70%. And that accounts for the big gain that we had in the overall market. The market did not do nearly as well if you take those the gains from those Magnificent Seven out. But the Magnificent Seven certainly helped us put together a really good stock market in 2023, not only a really good one, but a real surprise on the upside. And I don't think that we're going to see a continuation of those kinds of gains, spectacular gains in the Magnificent Seven and therefore the stock market or the overall stock market in 2024. I think we can move ahead. But we're not going to see the gains that we saw in 2023. And I think their big reason for that is that I think that the gains when we do get them will be less. But the market will broaden out. In other words, you're not going to see it in the focused on, or concentrated on the Magnificent Seven. But a lot more stocks from a lot more sectors will probably start to participate in what now looks like the start of a new bull market, although not a great one, but a good one.

2024 of course is a presidential election year. The economy is always a leading issue. You're a student of U.S. economic history, is there any sort of pattern for the health of the U.S. economy in presidential election years?

You know, there is a pattern and the pattern is that in the first two years of a presidency, the economy and quite frankly, the markets don't perform particularly well. It's when we close in on the election that we start to see better performance from the economy and better performance from the financial markets as a reflection of that. And the reason for that is pretty simple. And that is that the administration in its quest to probably get votes or to get reelected, starts to do things, fiscal policy starts to become more stimulatory. So we've seen that pattern develop over years and years and years. And it certainly happened in 2023. We saw the economy do better than expected, not accusing anybody of anything, but the economy did do better than expected in 23. The markets did better than expected in 2023. And so hopefully, and I cross my fingers when I say this, we'll see a continuation of that, in 2024 as we head towards the election. I don't think that will determine the outcome of the election. The markets are not particularly good at predicting or forecasting who's going to win the election. But the markets as well as the economy, might cross my fingers again, I say this is a forecast may be doing okay as we move into the latter part of the year, until the third quarter and the fourth quarter when the election occurs and what happens in the economy really, really counts.

Sticking with the political side of the economy, there are more deadlines in January and early February that Congress faces in order to avoid a partial government shutdown. This comes after a series of stopgap measures over the past few months. Do these short-term plans to keep the federal government funded and operating, do they impact economic performance?

Yes, they do. And if they last a long time, if we have an interruption in federal government operations for a long-extended time, it could have a fairly significant impact on the economy. The numbers that will result from such a shutdown will be, will be negative, there'll be offset when we reopen the economy or when it gets started again. But initially, it will have a negative impact. And that means the soft numbers that I was talking about for the first quarter and the second quarter should they occur, could turn into not just soft numbers, but negative numbers if the federal government in Washington starts to curtail its spending. Federal government spending in Washington, as much as we worry about it, and we worry for good reasons, government spending in Washington, obviously, it's a very important part of overall economic activity. And so if you shut it down, it will have a negative impact on an economy which is already slowing, which is, let's call it worrisome.

Jim is WAMC’s Assistant News Director and hosts WAMC's flagship news programs: Midday Magazine, Northeast Report and Northeast Report Late Edition. Email: jlevulis@wamc.org
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