I recently joined the elite group of armchair economists who placed some bets with some friends in a bar about the expectations of the US economy in 2024 (Its the new year after all). If you are not detecting the extreme sarcasm in my last sentence, let me be clear – trained economists have a hard time predicting the future. Armchair economists (a.k.a. The jobless, nothing-to-lose people who predict the future but hold no accountability for their predictions) have zero credibility in terms of predicting the future🙂 This is my big disclaimer for the rest of this article. I am no economist (except when I am at the bar with friends making wagers 🙂) and I certainly would not have a lot of credibility forecasting the future.
Having said the above, I have been a keen student of trying to understand some of the macro-economic factors that shape our lives. In today’s article, I want to talk about one of them, and as always, provide a framework on thinking about these macro-economic factors. While this article will talk specifically about 2024, these factors are elements to keep in mind as we look ahead. While I will go ahead and offer some predictions (at my own risk), what is more important is that you take away the framework of how to assess the US economy yourself. So maybe I can humor/entertain you a bit if I am unable to educate you 🙂
We measure an economy’s health and performance through GDP
Come on – I was not going to make this easy, was I? Any discussion of the economy has to be around GDP. GDP? What is that? It stands for Gross Domestic Product. It’s the sum of the value of all goods and services produced within a country’s border in a certain time period. It is the way we measure the economic health of a country. So if the GDP grew from one year to another, that is generally a good thing. If the GDP goes down from one year to another, thats not a very good thing typically. So when anyone is making a projection about where the economy is headed, they are trying to project the GDP growth levels. I kind of oversimplified that but this is the gist of it.
GDP is calculated quarterly, so people make quarter-over-quarter comparisons in addition to year-over-year comparisons. This is officially published in the US by the Bureau of Economic Analysis. You can see the most recent chart below showing GDP growth over the last 6 quarters. Looking at the below chart, you might be like – hey that looks pretty decent, doesn’t it? Absolutely yes! The economy has been growing at a healthy pace last 6 quarters in line with pre-pandemic levels, maybe even a tad higher.
So then the question, what are the components of GDP?
Before I help you understand my projection for the economy, its important to understand the basic building blocks of the US GDP. Without driving my readers crazy, there is a formula for calculating the total GDP. The GDP is the sum of the following:
GDP = C + I + G + (X-M)
Stay with me….dont run away!! 🙂
- Consumption (C) – basically the total of all goods and services purchased by the citizens – people like you and me.
- Investment (I) – this is the total of all investments in goods, services, capital expenses by companies.
- Government (G) – this is the sum total of all the government expenditures
- X – Exports
- M – Imports
- X-M = trade surplus or trade deficit
Ok i am done now. If you want to geek out more, you can read the Harvard Business School Article What Is GDP & Why Is It Important? (hbs.edu) to give you some more info.
It’s all about the US Consumer!
So each country’s GDP is driven by any of the different items listed above. Proportionally, each of these elements represent a different % of the GDP for different countries. So let me get to the punch line now.
For the US, Consumption represents 68% of the GDP!!
Did I hear that right?? 68%? So are you telling me all this other stuff around investments, government spending and exports/imports don’t matter? Well, they do – but for the US, what matters the most is private consumption. This has structurally been how the US GDP has existed for many years now. You can see in the below chart how the trend has shaped out over the years – it has been growing slowly and steadily.
Think about it – we always hear the US consumer drives the economy. Now you have it – we have that substantiated with some data. If the US consumer sneezes, the economy sneezes. If the US consumer spends a lot of money, the economy does well. If the US consumer tightens his/her wallet, the economy goes down. Almost 70% of the GDP is determined by the US consumer.
So is the US consumer going to continue to spend in 2024?
Now that I have painstakingly explained the components of GDP, it comes down to a basic understanding then of whether or not the US consumer is going to continue to spend. If US consuming spending grows in 2024, then the economy will most likely grow, and vice-versa.
So the key to any projection is honestly a fundamental understanding of whether the US consumer spending will go up or down in 2024. Big disclaimer at this point – I am oversimplifying this – like big time. But this is fundamentally what you need to watch – remember 68% of the GDP is driven by the consumer.
So let’s ask ourselves, what data should we be looking for to understand if the US consumer spending will be strong or not.
- Unemployment / jobs growth – If you and I don’t have jobs, then we are obviously going to not spend or radically limit our spending. So the first and fundamental data point to look at is whether most consumers will have jobs or not. Unemployment is at an all-time low of around 3.7% as of Jan 2024 and we continue to add jobs at a brisk pace (approx. 350K+ in Jan 2024) Unemployment Rate (UNRATE) | FRED | St. Louis Fed (stlouisfed.org) ; Here’s a close look at the extraordinary U.S. job numbers in January : NPR
- Real Wage growth– so while it’s good to know unemployment and job growth, to truly know if the consumer has spending power, we also need to know wage growth vs inflation (a.ka. Real wage growth). Inflation has been tamed significantly and is down to around 3% – 4% depending on which measure you look at. Nominal wage growth (before inflation) is around 4.5% – 5%. So overall real wage growth has been averaging a bit below 1%. Not stupendous but for sure wages are growing faster than inflation.
- US Consumer debt and personal savings rate – so the last piece of the picture is to understand the US consumer debt situation and the savings rate. In absolute terms, US household debt is going up but that is to be expected as prices go up. Consider the home prices that have been going up so naturally mortgage debt has also been going up esp with the high interest rates. But as a % of GDP US household debt has been trending down over the last decade and a bit flat over the last few years. Currently US Debt as a % of GDP is around 75%. (During the economic recession of 2008/2009 is was close to 100%). US household savings is around 4%. Thats not great but is about the same level it has been for a while. Household Debt to GDP for United States (HDTGPDUSQ163N) | FRED | St. Louis Fed (stlouisfed.org) ; Personal Saving Rate (PSAVERT) | FRED | St. Louis Fed (stlouisfed.org)
So when you look at the above data points, it points to a picture of consumer resilience. Now, this can obviously change if any of the above data points change. But the general expectation is that while consumer spending might slow a bit, its still going to stay steady in 2024.
Anecdotally, all this makes sense to me. I see all these families traveling when I travel for work (I travel quite a bit for work) – the airports and planes are packed! I recently took my family to Disney World and it was packed! I go to a restaurant and get sticker shock looking at the prices but the restaurants are packed! The US consumer is spending like there is no tomorrow 🙂.
Now, this is not all sugar and honey. There are some issues facing the US consumer:
- There are expectations wage growth will slow significantly esp for the large base of hourly workers. The Low-Wage Pay Surge Is Over, Threatening the Consumer Boom – WSJ
- US credit card debt continues to skyrocket at not very good levels. Credit card delinquency rates are trending upward at around 3% (though are still much lower compared to what it was during the financial crisis in 2008/2009). Delinquency Rate on Credit Card Loans, All Commercial Banks (DRCCLACBS) | FRED | St. Louis Fed (stlouisfed.org)
- The US consumer sentiment is at an all time low thanks to domestic politics and geo-politics. The US consumer does not ‘feel’ financially strong. Why Americans Are So Down on a Strong Economy – WSJ
- There is the thinking still that the effects of the high interest rate monetary policy might have a lagging effect (but I believe the FED is already trying to pre-empt this with setting expectations for rate cuts in 2024)
So my prediction for 2024 is….
Despite all the negative news I am still rooting for the US consumer. The US consumer will see us through 2024. I don’t doubt growth will slow in 2024 but I am not expecting a recession by any means. The reason is because the fundamentals (the data points I present above) look solid. I actually think the FED has done a nice job of helping steer the US economy through a soft (ish) landing.
There you go – I said it. In case you were expecting me to provide an actual GDP growth forecast, like an economist, I am sorry to disappoint. I am not even going there!!
But like any armchair economist, I reserve the right to be wrong!! 🙂
One final comment…
If there is one thing that bothers me a LOT about the US economy and why I think structurally we are in for some sort of ‘reckoning’ or ‘correction’, it’s the unsustainable amount of US public debt. You don’t need to be a political conservative to see that at some point, we are going to have to pay the piper. I know there are the MMT economists who pooh pooh this but I think to correct this fiscal debt situation, either taxes are going to have to go up or some kind of major reduction in government entitlement spending (read: social security, medicare) will need to happen in the future. All of those are political landmines and hence, not a lot of political will to take corrective actions. Ultimately this means less money at some point in the hands of the American consumer – which as I have painstakingly explained is not good for the economy.
But I am an optimist – I am still hopeful the US politicians can help figure this out.
I thought you talk about frugality. So are you telling me if we spend less, the US economy does badly?
This has been the great question my dear wife has always posed to me. It is indeed rather ironic and I have to admit in some ways funny too, to think about this. If you realize what happened during the global pandemic in 2020, this was a live, albeit sudden experiment. The economy collapsed as savings rates shot up through the roof. But this was a sudden shock to the system. If this had happened gradually, maybe we could have seen some structural changes to the US economy. I can never advocate spending beyond your means – that’s my position. A popular personal finance blogger who goes by the nickname Mr. Money Mustache has tried addressing this in his blog. You can read his perspective: What if Everyone Became Frugal? (mrmoneymustache.com)
Concluding thoughts…
Regarding that bet I made with my friends at the bar… As I said, I recently joined the elite group of armchair economists. Beware of what the armchair economists predict. They bear no accountability for their predictions. 🙂Jokes apart, my intent of this article is to give you all a bit more understanding of a framework to think about the US economy.
Thank you for reading! I wish you success in your personal finance journey!
Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.
