Economic Forecast Luncheon offers insight for 2024

Economist Phil Levy returned to the Corridor Business Journal’s 2024 Economic Forecast Luncheon as a keynote speaker to offer insights into 2024’s economic situation. Approximately 550 people attended the Jan. 30 luncheon at the DoubleTree Cedar Rapids Convention Complex to hear Mr. Levy and a panel of five Corridor business leaders offer insight into the economic prospects for 2024. The event was sponsored by Bankers Trust, with support from Kirkwood Community College, ITC Midwest, Transamerica, the Eastern Iowa Airport, UFG Insurance, Strategic Financial Solutions and CliftonLarsonAllen (CLA). Mr. Levy, Chief Economist with Flexport, began with an overview of past predictions of GDP by the International Monetary Fund (IMF), which adjusted its numbers every few months. This is not unusual, said Mr. Levy, because forecasting can be difficult – even for top economists. Currently, the IMF predicts a 2.1% growth for 2024, and the Federal Median Project predicts 1.4% – a slowdown from 2023, when the Bureau of Economic Analysis (BEA) reported a growth of 2.5%, which Mr. Levy attributed to a number of factors.

Looking at patterns

Forecasting relies on trends, scenarios and patterns, which can be disrupted by “shocks” to the economy – the 2020 pandemic, for example, Mr Levy said. The U.S. GDP fell at a 28% rate in the third quarter of 2020, then rose at 35% in the third quarter of 2020. Because regular policy patterns were not being followed, the enormous fiscal stimulus meant personal income didn’t fall and bank accounts ballooned. The Fed’s balance sheet more than doubled, from $4.2 billion to $9 billion.

Goldilocks economy

In a Goldilocks economy, everything is nearly “just right,” Mr. Levy said – there is full employment, economic stability, and stable growth, and the economy is not expanding or contracting too much. In this economy, inflation gradually glides down to 2%, and the Feds begin to lower the interest rates in the first half of the year. GDP growth remains positive, and unemployment remains low. This is the “default position that many people find themselves in,” said Mr. Levy.

Bear No. 1 – Hard Landing

The Fed began raising its policy rate in 2022, hitting its current level in August 2023. Economists believe the impact is felt with “long and variable lags” – for example, one to two years, which could mean more slowdown to come. The real Fed funds rate turned positive only recently, in May 2023. “This is all the more reason to think that effects are yet to kick in,” said Mr. Levy. In a “hard landing” situation, inflation drops to 2% or lower, prompting the Federal Reserve to subsequently reduce interest rates. Unfortunately, the timing proves insufficient to prevent an economic downturn, which results in a typical business cycle, characterized by job cuts, increased unemployment, declining confidence, hesitant consumers, and eventually, a decrease in GDP.

Bear No. 2 – Persistent Inflation

In a persistent inflation scenario, core inflation remains stagnant at 3% or experiences an upward trajectory. Consequently, the Fed is compelled to maintain interest rates at higher levels or possibly resume hiking them, but it's crucial to emphasize the significance of holding rates steady. In addition to the immediate repercussions of increased rates, the market is surprised by the absence of rate reductions, leading to shaken confidence and a sense of pessimism.

Bear No. 3 – New Shocks

Global events can have dire effects on the U.S. economy. “The U.S. is not immune to a slowdown to the rest of the world,” said Mr. Levy, citing China and Europe’s current difficulties. Conflicts, such as the current situation in the Middle East, can affect energy prices or shipping, he said.

Predictions

Putting all the current situations together, the results are that interest rates remain high for longer than people expected, shocking the market. Mr. Levy said his long-term forecast is for a recession, predicted a year from now. “We can’t get rid of inflation…unless things slow down,” said Mr. Levy. Following the presentation, Mr. Levy took questions from the audience, followed by a panel discussion of Corridor business leaders representing different business sectors. Jack Evans, Chair of the Board of the Hall-Perrine Foundation, moderated the panel, which included Peter Bittorff, plant manager for Cedar Rapids General Mills; Scott Friauf, president and CEO of Rinderknecht Associates; Mike Gerdin, chairman and CEO of Heartland Express; Jamie Ohl, president of Individual Solutions for Transamerica; and Katie Thomas, president and CEO of Honkamp.