Welcome to the February 2024 edition of NC Economy Watch: an update on what’s happening in the North Carolina economy and what it means for you, brought to you by the Labor & Economic Analysis Division (LEAD) of the NC Department of Commerce.
In this edition of NC Economy Watch, we review some of 2023’s key economic trends and speculate on how these trends might evolve in the year to come. Slowing economic growth and lower price inflation have led to widespread expectation that interest rates will finally start to ease in 2024. We’ll be watching for signs of how far interest rates might fall and whether our economy will experience a soft landing, hard landing, or no landing at all in the months ahead.
How Will the Economy Land in 2024?
Although we’re two months into the new year, we still don’t have a complete picture of how the economy performed last year. Some indicators for the final months of 2023 have yet to be published, and upcoming data revisions could meaningfully alter our understanding of economic conditions. It’s too soon to make any definitive statements about the 2023 economy, especially at a detailed level.
That said, now might be an appropriate time to take a step back and look at the “big picture”, broadly assessing our economic progress at an aggregate level and speculating on how the economy might evolve in the year to come.
The early pandemic years of 2020 through 2023 saw consumer demand for goods and services outpacing our economy’s productive capacity, resulting in rapid price inflation. The Federal Reserve slammed on the brakes, hiking interest rates at the fastest pace in over 40 years to cool our overheated economy and get a handle on rising prices. As the labor market started to loosen and price growth started to slow, economists debated the likelihood of two possible scenarios emerging: either a “hard landing”, where an economic recession causes inflation to fall, or a “soft landing”, with inflation returning to more sustainable levels without the economy plunging into an outright recession.
We often emphasize that restoring balance to the labor market is essential to achieving a soft landing, and so far, we’ve seen remarkable progress on this front. The number of unfilled job openings in North Carolina has declined precipitously after surging to record highs during the pandemic, falling to near its 2019 level as of November 2023 [Figure 1]. This doesn’t mean that the situation has fully normalized—2019 saw the tightest labor market on record at the time, and conditions remain favorable to jobseekers at present—but a softening labor market means that wage gains are likely to slow, which should help reduce inflationary pressures and lead to a more manageable pace of price increases.
Indeed, as the labor market has softened, price growth has slowed further than most economists had initially expected. Over-the-year growth in the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, declined from a 40-year high of 7.1% in June 2022 to 2.6% in December 2023 [Figure 2]. Even the Cleveland Fed’s median PCE price index, which excludes items with volatile prices and tends to be more stable over time, has fallen from its early 2023 highpoint. While these measures remain elevated, they are both trending toward the Fed’s 2% inflation target, potentially putting a soft landing within sight.
It’s difficult to predict what direction our economy will take in the year to come. A soft landing is by no means assured. We can’t rule out the potential for a hard landing as consumers and businesses come under increasing pressure from higher interest rates. On the other hand, some economists are predicting that we’ll have “no landing” at all—that strong wage growth will continue to drive prices higher and keep inflation elevated above the Fed’s 2% target.
Thus far, however, nearly every trend has been consistent with a soft landing. Economic growth is slowing to a more sustainable pace without resulting in a recession, the labor market is loosening without resulting in a surge of mass layoffs, and inflation has come down considerably from its 2022 peak. This has led most economists to predict that the Federal Reserve will take its foot off the brake and start to lower interest rates in 2024.
Exactly how far interest rates will fall is in dispute. The most recent projections from Fed board members and regional bank presidents indicate they expect their benchmark interest rate to end 2024 at 4.6%, but investor sentiment (as implied by futures pricing) suggests a faster pace of rate cuts, with financial markets expecting the federal funds rate to decline to 4.1% by the end of this year [Figure 3]. While a 4.6% or a 4.1% federal funds rate is still higher than the rock-bottom rates we saw earlier in the pandemic, it would represent a substantial decline from its peak and could offer meaningful relief to homebuyers and businesses seeking to borrow money.
Embedded within these differing expectations are disagreements about the future course of inflation, labor markets, and economic growth. The higher interest rate path in the Fed’s projections could suggest that inflation will fall more gradually as the economy continues to grow. Meanwhile, the market’s expectation for much lower interest rates might suggest more rapid declines in inflation and, potentially, slower economic growth and a more significant deterioration in labor market conditions.
Will the economy settle into a soft landing, careen into a hard landing, or experience no landing at all? Stay tuned to NC Economy Watch as we continue to report on these trends and break down what they mean for jobseekers and employers in our state.
For inquiries and requests, please contact:
Meihui Bodane, Assistant Secretary for Policy, Research and Strategy
NC Department of Commerce, Labor & Economic Analysis Division (LEAD)
 Source: Federal Reserve (Summary of Economic Projections, December 2023); CME FedWatch Tool (accessed February 5, 2024)