Clint Eastwood, an actor I’ve admired since his days on Rawhide in the 1950s and ’60s, shot to fame with the movie The Good, the Bad, and the Ugly. Today, this title accurately represents the economy, which has both positive and negative aspects, as well as uncertainties. While this piece will provide a mix of each component, it’s up to you to decide which one is prevalent.
There’s a lot of good in today’s economy. Gross Domestic Product (GDP), the broadest measure of the economy, is steadily growing, leading to increased production and income. According to the heuristic definition, we’re not in a recession because GDP isn’t declining for two consecutive quarters. Additionally, the labor market is seeing improvement, with job growth rates helping to alleviate labor shortages caused by the pandemic. Unemployment rates are at their lowest in decades, at 3.4%, and the number of job vacancies per unemployed person has decreased significantly.
Another important trend is the moderate rise in inflation. Although prices continue to increase, their growth has slowed. This means that more workers are receiving pay raises to keep up with rising costs.
However, there is a downside to the economy. Although inflation is beginning to slow, prices are still on the rise, and many people are experiencing a lower standard of living than they did four years ago. Construction, manufacturing, and second-hand home sales have all slowed notably, driven primarily by interest rates. Moreover, consumers are feeling more stress, with retail sales declining in four of the past five months. Despite an initial pause during the pandemic, the amount of consumer debt has recently surged, and household savings have been significantly depleted.
Finally, there are two uncertainties: possible banking problems and the risk of a US Treasury default. While a widespread financial meltdown is unlikely, the failure of three major banks raised fears about the safety of our savings. The debt ceiling increase drama has also been an ongoing issue, but my expectation is that a compromise will be reached.
Despite all of these ups and downs, what should we expect? Three scenarios are possible. The first involves a slowing economy that continues to grow but at a lower rate, avoiding significant job loss. The Federal Reserve is predicted to begin cutting rates in the first half of 2024, leading to a “soft landing.” The second scenario sees an economic downturn similar to a typical recession, with a relatively short and shallow impact—the only silver lining is that unemployment rates may rise a few percentage points. The final scenario is a hybrid, with moderate employment growth but significant losses for investors in various areas of the economy.
In conclusion, we can hope for a satisfying ending to this economic version of The Good, the Bad, and the Uncertain. Whether or not this script plays out remains to be seen.