The year 2024 started with optimism for the economy. Despite relatively high interest rates and efforts by Federal Reserve to slow the pace of the economy in order to reduce the rate of inflation, a recession was avoided. The hope for a “soft landing” in the economy, where price increases are moderated without pushing the economy into reverse, seemed to be fulfilled. And hopes rose that the Fed would start cutting its key interest rate within a year.

But a few weeks ago, that optimism seemed to fade. In one day, Dow Jones The Stock Exchange Average, one of the most widely followed stock market indicators, fell 1,000 points, drawing media attention. The drop came after a disappointing jobs report and a rise in the unemployment rate. It was also reported that after the higher unemployment rate was released, one of the indicators of the future economy, called Sahm’s rule, began predicting a recession.

I immediately received numerous calls asking for my interpretation of what was happening with the economy. In my responses, I first gave a background on the factors shaping the current economy. Then I discussed plausible predictions about where the economy is headed. I will try to do the same here.

The Covid-19 pandemic and the ensuing recession prompted the federal government to “inflate” fiscal policy. Fiscal policy is the government using tax and spending tools to influence the economy. The fear during the pandemic was that the economy would not recover and that unemployment would remain in double digits. As a result, the federal government pumped trillions of dollars into the economy in 2020, 2021, and part of 2022 in the form of program spending and financial support for households and businesses. At the same time, the Fed’s monetary policy increased the money supply by trillions of dollars and lowered interest rates to record lows. The economy began to recover in the second half of 2020. By the end of 2020, the unemployment rate had fallen by half, and the annual rate of all-item inflation was a low 1.3%. The economy appeared to be headed for a strong, low-inflation recovery.

But what was different from previous post-recession recoveries, and what policymakers didn’t anticipate, was the global supply chain problems that kept many products off the shelves. That’s why, when households were flush with cash from government bailouts and ready to spend, there were fewer things available for them to buy. The shortages affected everything from houses to paper towels to lumber. There was a huge gap between the amount people wanted to buy (“demand” in economics jargon) and the amount available to sell (“supply” in economics parlance). The result was steady price increases, with annual inflation reaching 9.1% in June 2022.

Although the Fed was late in anticipating the problem, it reversed its monetary policy completely in 2022, raising interest rates and tightening the money supply to slow consumer spending and moderate price increases. At the same time, global supply was being fixed and shelves were being stocked. The combination of less robust “demand” and more “supply” allowed the annual inflation rate to fall to almost 3%, still higher than in 2020 but certainly a sign of progress.

On top of these accomplishments is the fact that they were accomplished without a recession, which is remarkable. Which brings us to today. Will the Fed continue to claim the glory of having brought average price returns down to a more normal 1% to 2% without a recession in the process?

For those inclined to answer “no,” there are three worries: Households have depleted their COVID savings and will have to borrow more and more to keep spending going. But that can’t last forever, so at some point consumers may cut back on spending, forcing businesses to cut wages and staff.

Until recently, investment markets were booming. Since 2021, the stock market is up 25% and average home prices are up 33%. If deep cracks appear in the economy, investments like stocks and real estate can start to lose value, and those losses can traumatize the economy.

Finally, while the Fed recognizes these concerns and has signaled its willingness to begin cutting interest rates, there is concern that the Fed may have waited too long. Pessimists believe that the damage has already been done and a recession is already baked into the pie.

And while the optimists don’t expect a recession, they do see these three concerns. Optimists agree that consumer spending and the labor market are slowing, investment markets may be giving back some of their gains, and the Fed has been slow to cut interest rates and expand the money supply. But while pessimists see these conditions as leading to a recession, optimists see them as leading to a slowdown. Indeed, optimists point out that the recent rise in the unemployment rate was not due to job losses but rather because fewer jobs were being created than were being sought. So optimists expect the economy to continue to grow, just at a slower pace. Optimists see a slowdown, not a collapse, in the economy.

Let me throw mine in two cents worth about North Carolina economic future. Every month I construct a leading economic index for North Carolina economy. The indicator has been relatively stable over the past year, suggesting a path for continued growth in the state.

At the beginning of 2024, I predicted a fragile domestic economy for this year. By fragile, I meant some pullback in growth and investment, as well as a few months where the unemployment rate would rise, but no sustained period where all the important elements of the economy would decline. Hence, the choice for the rest of 2024 seems to be between negative growth and recession, or slower growth that could result in higher unemployment but no recession. Which makes more sense? You decide.