Good morning,
It’s 2024, and the economy remains in limbo. Still, some clarity is coming into view on a few big questions:
Will the Fed begin to cut interest rates soon? Yes, but not as soon as some had previously hoped.
Will there be a downturn? Most economists say no, but there are some holdouts.
Nevertheless, the strong economy powered by the U.S. consumer that kept us out of a recession in 2023 is slowing. Will it be enough to convince the Fed to finally start slashing interest rates?
In this latest installment of our quarterly economic report, we’ll break down where we stand after the first three months of 2024 and where we’re headed.
30-YEAR FIXED MORTGAGE RATES
Keeping inflation at bay is proving more difficult than expected.
For the fourth month in a row, inflation was worse than anticipated, coming in at 3.2% in February, according to the Labor Department’s consumer price index. Core inflation, which excludes the volatile food and energy subindexes, was 3.8% and also above forecasts, though it was the lowest annualized core inflation reading since May 2021.
That’s well above the Fed’s target inflation rate of 2%, but price increases have weaned substantially from the CPI’s peak at a 41-year-high of 9.1% in June 2022.
But one big impact of the Fed’s inflation-fighting campaign continues to be the corresponding rise in mortgage rates.
Home loan borrowing costs have more than doubled, after hovering at a record low of below 3% for much of 2020 and 2021, and nearing 8% in October, per Freddie Mac. Now, mortgage rates sit slightly below 7%, but economists say rates aren’t likely to return to their early pandemic levels. To make matters worse, the median sales price for U.S. homes jumped 29% from the second quarter of 2020 to the fourth quarter of last year, per St. Louis Fed data. Inventory is near an all-time low, while rent prices are now 30% higher than they were before the pandemic.
The housing affordability crisis could explain why, even as the data suggests a resurgent post-pandemic economy, many Americans are pessimistic about the economy under President Joe Biden.
Would-be homebuyers, investors and businesses alike are waiting with baited breath for the Federal Reserve’s next move. The central bank once again held interest rates steady at its March meeting, but indicated it expects to slash them three times this year.
Investors predict the Fed’s June meeting to be the most likely time for the first rate cut since March 2020. Lower interest rates stimulate growth as the cost of borrowing for consumers and businesses declines.
Overall, today’s economy is solid, says Quincy Krosby, chief global strategist for LPL Financial. Sure, it’s nothing compared to the roaring-back-to-life post-pandemic economy of 2021 and 2022, but it’s also far from the recession many economists predicted.
It almost sounds like the elusive “goldilocks” scenario the Fed had hoped to achieve in its war on inflation: Slow the economy just enough to bring down inflation, but not so much that it induces a recession.
Still, the start of the first quarter brought a slew of layoff announcements, especially in tech, from firms like Sony, PayPal, Microsoft and Salesforce. American employers slashed more than 84,000 jobs in February, the most of any February since 2009.
The unemployment rate also jumped from 3.7% in January to 3.9% in February, the highest unemployment rate since early 2022, though well within the historic range. Plus, the U.S. economy added 275,000 jobs, which was more than economists expected.
So far, Krosby says the labor market has held up, but economists are watching the unemployment rate closely, especially after a jump of 0.2% in one month.
“The engine of growth for the U.S. tends to be consumer spending,” she tells Forbes. Consumer spending makes up about two-thirds of GDP. “If (unemployment) crosses over 4% enough to grab headlines that the economy is slowing, that the labor market is slowing, you will see consumer spending slow down.”
Major stock indexes continued to hit record levels in the first quarter despite high interest rates. The Dow Jones Industrial Average and S&P 500 reached all-time highs following the dovish expectations outlined at the Federal Reserve’s March 20 meeting.
In the first quarter, the S&P 500 and tech-heavy Nasdaq jumped 11% apiece and the Dow increased 5%.
The hype over artificial intelligence played a big part in the market gains. Nvidia, which designs the semiconductor chip technology for generative AI, became the third company in U.S. history to top a $2 trillion valuation in February, and its shares are up 225% in the past year, as of Thursday afternoon.
AI has even brought legacy tech titans to new heights. Microsoft, which has backed ChatGPT maker OpenAI, became the most valuable company in the world in January, surpassing Apple, which had held the crown since 2018. Even shares of old-school computing company Dell rose to a record level thanks to its growing artificial intelligence unit.
Few saw this market rally coming, and it remains to be seen how long it will last. JPMorgan Chase’s top global equity strategist Dubravko Lakos-Bujas warned about a “high degree of crowding” in the market, while Goldman Sachs strategists said a concentration in the most valuable tech stocks “could exacerbate” a major selloff.
Krosby looks to which sectors are leading the market for clues about where investors believe the economy is headed. The market is optimistic if consumer discretionary sectors, like tech and industrials, lead the way, but utilities or consumer staples pulling ahead would be a sign slow growth is expected.
So far, communication services—which includes companies like Alphabet, Meta and Disney— and information technology are some of the biggest gainers this year, Fidelity data show.
“The stock market looks ahead,” Krosby said. “Economic data looks backwards.”
THE BIG QUESTION
If macroeconomic data is any indication, the labor market looks strong. So why is it that we’re also seeing headlines about mass layoffs and difficulty finding work?
One key reason is that the job market looks vastly different depending on the field. In the Bureau of Labor Statistics’ latest report, the economy added 275,000 jobs, but most of the gains occurred in five sectors: health care, government, food services and drinking places, social assistance, and transportation and warehousing. Other major industries, like financial activities and information, saw little change, per the report, and those are the industries that have seen many of the layoffs this year.
“I think what people are feeling is real, it’s just not simply explained by the numbers, and that’s a frustrating feeling for job seekers who’ve been looking for a long time,” says Jena McGregor, Forbes’ senior editor covering careers and the workforce.
After the initial months of the pandemic, the job market shifted, and employees had more power as companies rushed to fill positions, offering flexible and remote work and higher wages. That changed employee expectations, McGregor explains.
There’s also what employers describe as a “skills mismatch,” she says. The skills that employers need for jobs are shifting quickly, and there aren’t enough people who have the skills they are looking for—particularly when it comes to technology like AI.
In response, McGregor says companies are focusing on “upskilling,” or essentially training their workforce for the types of jobs they expect to need in the future. Employers like Walmart and General Motors have also removed four-year degree requirements for many jobs, but the “skills-based” hiring movement hasn’t yet meaningfully increased the hiring of candidates without degrees, research shows.
Another change in the labor market: The Great Resignation is over. After a record number of people quit their jobs in 2021 and 2022, the rate of workers quitting fell to its lowest level in over three years in January.
Rachel Becker, recruiting manager at Forbes, says she’s seen the number of applicants to jobs decline overall, because uncertainty in the job market is making people less inclined to leave their current roles. That’s translated to recruiters doing more passive outreach to candidates, she said.
“We were always selling the opportunities and the company to candidates whether they’ve applied or not, but it’s a lot more selling when it’s somebody you’re reaching out to who wasn’t actively looking for a position,” she says.
WHY IT MATTERS Numbers don’t always tell the full story of what people on the ground are feeling. And with all of the economic challenges we’ve faced over the last few years—from a global pandemic that triggered a slew of layoffs, to rising inflation—it’s understandable that many are anxious. But unlike the short-term disruptions like pandemic lockdowns, the job market is grappling with long-lasting trends: Labor shortages in key fields, and a mismatch of skills as technology evolves quickly. It remains to be seen how employers, job seekers and even our education systems will adapt.
MORE: Walmart Plans To Remove College Degree Requirements From Hundreds Of Corporate Job Descriptions
STRATEGY AND SUCCESS
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- Why The Dogs Of The Dow Can Still Hunt
QUIZ
Despite having the word “gold” in its name, a Goldilocks economy doesn’t typically coincide with value gains for the precious metal. Still, as gold hit an all-time high earlier this week, which of the following is said to be driving this surprising gold rush?
A. Chinese investors seeking a hedge against a commercial real estate crisis
B. U.S. investors repositioning portfolios after the stock surge
C. The upcoming U.S. presidential election
D. All of the above
BEYOND THE NEWSROOM
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ACROSS THE NEWSROOM
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