Economic Review 2023 and What’s Ahead for 2024
Kevin M. Bahr CBEI Chief Analyst; Professor of Business Sentry School of Business and Economics
This report will provide a summary of the 2023 performance for a myriad of economic measures and offer a glimpse of what’s on the economic horizon for 2024. In addition, the underlying factors that drove the economic changes in 2023 will be explored. Overall, and relative to most developed countries, the U.S. economy performed extremely well in 2023. Economic growth remained surprisingly resilient despite rising interest rates. Consumer spending drove moderate growth in the first half of the year and strong growth in the third quarter. The labor market was the strongest it had been since the 1960s. Inflation declined significantly and was lower than inflation in most developed countries, but remained higher than desired. American families, however, may not have completely felt the strength of the economy. Home affordability became more challenging as rising interest rates followed a spike in housing prices that began in 2020 but began to subside in 2023. The housing market, combined with significant price increases in items like food and autos that occurred in previous years, created financial challenges. It is important to note that the median net worth of American families has increased significantly since 2019, debt burdens have generally declined, and real wages increased in 2023 due to the strong labor market. Economic Growth In response to rising inflation, in March 2022 the Federal Reserve began a policy of aggressively raising interest rates to lower overall demand and consequently economic growth. The Federal Reserve targets the “fed funds rate” – a very short-term interest rate (the overnight borrowing rate between banks) that when changed, typically has a rippling effect through the financial markets. Increasing the fed funds rate increases borrowing costs and lowers interest rate sensitive spending by consumers and business. Although global factors outside the control of the Federal Reserve were the primary drivers of recent inflation, the Federal Reserve was focusing on what it could do to lower inflation – increase interest rates. After beginning 2022 at 0.00-0.25%, the fed funds rate was increased seven times to a targeted range of 4.25- 4.50% by yearend. As a result of the aggressive increase, by late 2022 many economic forecasts for 2023 were hoping for a “soft landing” (weak economic growth) but an economic recession (negative economic growth for two or more consecutive quarters) seemed increasingly plausible. In its December 2022 projections, the Federal Reserve expected economic growth of only 0.5% in 2023. The upward trek in interest rates continued in 2023, with four more rate hikes putting the fed funds rate at 5.25-5.50% in July. Despite rapidly increasing interest rates and economic prognostications of weak economic growth at best, the U.S. economy in 2023 remained resilient with moderate economic growth in the first-half of the year, and strong economic growth in the third quarter. The table below shows how changes in the four components of Gross Domestic Product (GDP) contributed to the change in U.S. economic growth since the third quarter of 2022. (Economic growth is measured by changes in GDP, which is the value of goods and services produced in a given time period.) Although rising interest rates slowed the economy in the first half of 2023 relative to the second half of 2022, moderate economic growth of 2.2% and 2.1% occurred in the first and second quarter, respectively. Third quarter economic growth was exceptionally strong, at
Central Wisconsin Report - Spring 2023
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