Economic Outlook

In advance of my thoughts for the week, two things. First: Monday was a day to join together to honor Dr. Martin Luther King Jr, whose legacy of hope continues. I am fueled especially by my favorite of his words of inspiration: “Faith is taking the first step even when you don’t see the whole staircase.”

Second: I’d like to highlight our Celebrate Business Success/Service Success awardees for this month’s Lunch With Leaders. Congratulations first to the Pioneer Press, for 175 years in business – before MN became a state! Check out and buy their book, Twin Cities Snapshots, History through the Lens of the St. Paul Pioneer Press.  I have it already and it is a beautiful tribute to our city’s history. Also, congratulations to Merrick Community Services, for their 116 years of service to Saint Paul. Merrick supports individuals and families to navigate life transitions, find health and stability, and promote independence. This includes food service, Meals on Wheels, and employment services.  Interested in supporting? Ahead are a food drive, March 1-30, and their Spring fundraiser, Uplift. 

Last week at our quarterly Lunch With Leaders, we heard from Ben Malin, VP of the Research Division of the Federal Reserve Bank of Minneapolis. The topic? One of my favorites: “Recent Economic Developments and Outlook.” Ben described 2023 as “The Return of Supply.”  It was a year of pleasant surprises in that inflation moderated, despite economic activity being more resilient than expected. Meanwhile, the labor market – thought still tight – has moved into better balance. 

If you remember, the Fed raised interest rates by more than 4% in 2022 and yet, in 2023, the economy modestly surpassed all expectations (measured by inflation levels, GDP growth, and unemployment). Inflation levels fell steadily from a high of 7% in 2022 to approximately 3% at end of 2023. There is anticipation for more price “deflation” into 2024, including both commodities and housing/rent prices. Still higher than pre-COVID but continuing to course correct. The big question: did we actually experience a recession in 2023? The answer is no.  Overall economic growth was just under 3%, against projections of about .5% growth. Current projections are that 2024 growth will be slower, more like .5 - 1% GDP growth, but still – again – not into recession territory. 

What “carried the day” in terms of GDP? Mostly consumer spending. Household spending has been more resilient than expected, and workforce productivity improved. And the tight labor market is slowly returning to balance. In early 2022, nationally we saw about a 6 million-person gap between job openings and size of labor force (both employed and looking). That gap closed through the end of 2023, with labor force participation rate increasing. By the end of 2023, that gap was closer to 3 million persons, which should lead to a moderation in further wage growth.

In terms of housing: in 2023, the components most contributing to inflation were Housing and Services (excluding energy) prices. Housing/rental prices look to have peaked in early 2023 and should fall further. To get inflation down to the goal of 2%, we will need to see both Housing and Services prices continue to course correct in 2024. Of note: the largest component of Services inflation has been wage increases. 

The Federal Open Markets Committee (FOMC) remains committed to bringing inflation back to target level of 2% (currently at approximately 3%). At their December meeting, no change was made to interest rates. Most news out of that meeting were results of economic projections we’ve discussed above. We may be near the peak of the policy rate hiking cycle, and the FOMC now is at the point of the monetary policy “tightening cycle” that requires even more care. Chair Powell’s post-meeting remarks reflected that: “We will continue to make our decisions meeting by meeting, based on the totality of incoming data…”  So we’ll see. If you’d like to see the FOMC’s projections for 2024, you can read these notes and summary of economic projections from the December meeting. 

See you in the trenches,

​B