The economy in 2023 was resilient. The unemployment rate is currently 3.9%, marking 21 consecutive months below 4%. An average of 239,000 new jobs per month were created in 2023 and the economy grew by a whopping 4.9% in the third quarter. Inflation is currently at 3.7%, which is down from its peak of 8.2% in April 2022.
One might believe that the Federal Reserve has achieved a “soft landing,” which is bringing down inflation to the Fed’s 2% target without causing a recession; but I am not willing to declare this yet. Traditional drivers of inflation – namely higher oil prices and higher interest rates – remain with us. It remains an open question whether inflation can fall to 2% in 2024 without a recession.
Consider the seven recessions since 1973. The 1973-75 recession was caused by the price of oil tripling following the Middle East Oil Embargo. The 1980 recession was caused by the price of oil tripling again due to the Iranian Revolution. The 1990-91 recession, which cost George H.W. Bush his reelection, resulted from the price of oil doubling due to Saddam Hussein’s invasion of Kuwait.
People often believe that the 2001 recession was caused by the September 11 terrorist attacks, but the timing does not match this explanation as that recession began in March. People also blame the Enron scandal for this recession; but again, the timing does not match as Enron’s fraud was discovered in October. It is likely the recession exposed the fraud instead of the fraud causing the recession. Note the Federal Reserve increased the Federal funds interest rate from 4.75% in April 1999 to 6.5% by summer 2000. The price of crude oil nearly tripled during this time, increasing from $12/barrel to $35/barrel. Thus, the 2001 recession was likely caused by higher interest rates and oil prices.
Prior to the Great Recession, the price of crude oil nearly tripled, increasing from $55/barrel in January 2007 to $133/barrel in June 2008. The Federal Reserve also increased the Federal funds rate from 1% in May 2004 to 5.25% by May 2006; this likely contributed to the housing market crash. In 1980, the Fed hiked the Federal funds rate to double-digit levels to “break the back” of the 1970s inflation and induced a major recession in 1982-83. Thus, the COVID-19 recession that lasted from February 2020 to April 2020 was the only recession not preceded by higher interest rates and/or higher oil prices. Of course, the COVID-19 recession was a unique circumstance, namely being caused by a government mandated shutdown of the economy.
Both higher interest rates and higher oil prices are currently present, which concerns me for 2024. As of this writing, oil is $85.84/barrel and the Federal funds rate is at 5.25%, both of which are substantially elevated from their pre-COVID levels. However, this was also true in 2023 and the economy remained robust. We will hope the same for 2024.