The economy and your personal finances: Looking at the year ahead

In some ways, 2023 was a year of conundrums and contradictions with respect to the U.S. economy.  Whether looking at data points or narratives, they seldom ever move in a straight line. At times, they take dramatic turns. Volatility has become a feature of our lives, not a bug.

From a technical or actual vantage point, a recession has been avoided.  Despite this resilience, some 59% of Americans responding to a Bankrate survey said they felt like they were experiencing a recession. This is understandable given that inflation over the past several years has usurped about one-fifth of their buying power, based on the increase in the Consumer Price Index.  On a year-over-year basis, inflation is coming down. But consumers have not been relieved of the burden of high prices.

Closing out the year, gasoline prices reached the lowest in about two years. Stock prices have edged to record levels and yields in the bond market have edged lower. The Federal Reserve has signaled that it will begin reversing course in 2024 and will likely be cutting rates, depending on the future course of inflation and the broader economy.

 Here are a few of the key themes to watch for the year ahead involving the economy and Americans’ personal finances.

-Inflation: Many Americans have felt robbed of purchasing power because of the highest inflation in a generation. And that impact has been real, leading to the notion of the so-called "Silent Recession", as noted by my Bankrate colleague Sarah Foster . The rise in the Consumer Price Index means that people had to pay $120 for what used to go for $100.

-Uncertainty: Just among the things that we can identify, allowing for some things that we cannot, there’s no shortage of sources on the uncertainty front. With two hot wars around the world and percolating trouble spots elsewhere, the global economy faces numerous risks. Over the past several years, we’ve seen how the invasion of Ukraine and the pandemic have had dramatic impacts on lives and pocketbooks.

-U.S. election year: With the White House and control of Congress up for grabs in the November election, the stakes are high.  Between tax issues, debt and deficits, looming funding shortfalls for Social Security and Medicare, trade policy and immigration challenges, it remains to be seen whether Washington will continue to be seen as a source of dysfunction, unable to foster much-needed solutions for important problems.

-Interest rates and the Fed: Some rates appear to have peaked with mortgages at the top of the list. Other borrowing rates could follow and the same is true for yields on savings.  Although the Fed appears on track to reduce its benchmark rate, it would take a crisis to take rates back down to record levels. That suggests the next version of “normal” could be rates that are higher than many had grown accustomed to. Lower from here is good for borrowers including the many who are carrying highly expensive credit card debt, but not so good for those looking to benefit from the higher yields on savings. Over the past year, it has been pretty easy to find annual yields on savings of 4%-5%.

-The stock market: 2023 brought the holiday gift of a strong rally for stocks (and bonds). Will that be followed by a period of calm or volatility or a correction? For long-term investors, that’s mostly noise because those investing/saving for retirement should generally avoid market timing.

-Employment: The job market notched a more than 50-year low in unemployment of 3.4% in 2023. Through November, the U.S. added an average of of 232,000 jobs over the past year, down from about 400,000 in 2022. Economists see further moderation or slowing in hiring and a rise in the unemployment rate. As Federal Reserve officials like to say, that suggests that the supply and demand for labor is coming into better balance. The number of job openings will likely edge lower, getting closer to pre-pandemic levels. That would likely coincide with slower wage growth which has recently been rising at annual rate of about 4%, which is above the recent annual rise of inflation. For consumer spending to remain stable, the job market just lend further support.

Please share your thoughts on the economy and personal finance issues in the comments section below. And thank you for your engagement! It truly means the world to me!