*Editor’s Note: CC Biz Buzz is a monthly column series that features insightful commentary from a member of the Columbia College Robert W. Plaster School of Business faculty.
By Rudy Araujo
The author cannot help himself writing this column imbued by the spirit of the holidays. Thus, it has a hopeful tone, with some caution to adjust for what is known as a reality check. The subject is the economy and what it can teach us.
As the year ends, expectations build about what the future holds. One of the questions asked is whether the economy will continue its jitters or find calmer waters. Many experts fill the pages of specialized magazines, newspapers and other media, making predictions. Their reports describe an economy overcoming the lingering effects of the COVID-19 pandemic and shaking off the weight of a relentless inflationary period. At the same time, these reports comment on the resiliency of the labor market and the economy’s avoidance of a recessionary threshold.
Indeed, as the news and pundits portray it, the economy had many lights on red and yellow during 2023, as if it were a faulty car’s dashboard. However, as the year closes, most of these lights are turning green, and the economy is slowly moderating and preparing for growth. The dreaded hard landing has been avoided. The inflation rate has fallen from 9.1% to 3.1%, while the unemployment rate is joining the historical lowest levels at 3.7%, and the expected growth for 2024 is 2.4%.
But wait, it is no time to bring out the champagne bottle, because recovering the economy’s stability has come at the cost of higher prices and interest rates. The adjustment to a new normal comes at the cost of many goods and services being more expensive, which seems to carry a purposeful decision made by the sellers to adjust their prices upward, taking advantage of the inflationary pressures. Moreover, the increase in interest rates is already impacting the mortgage market and forcing consumers to be thriftier, which ultimately explains why the economy is more stable.
Here is where the cautious hope comes into play. The projections are that 2024 will be a year of moderate growth and stability. The coming year could be one where we learn how to live in a more expensive economy due to increased prices and interest rates, changing our consumption behavior.
The coming year could be one where we learn how to live in a more expensive economy due to increased prices and interest rates, changing our consumption behavior.
A higher interest rate will entice people to save more. Once the economy shows enough stability, interest rates may come down somewhat, but let us hope they never return to rates close to zero. Suppose interest rates on savings are above 4%. In this case, people will save more to have a little extra for end-of-year expenses, tax payments or cashflow balancing. Some populations, like the retired, may complement their social security checks with the product of their savings, moving their hard-earned money from riskier markets.
With higher interest rates on savings come higher rates on lending. A near-zero interest produces inefficient spending and investing. A higher rate forces consumers to make wiser decisions about their purchases on credit and businesses to fund their most profitable ventures, leading to a more efficient use of resources. The mortgage market may also show some adjustments in lowering real estate prices to attract buyers who will feel compensated for their higher mortgage rate.
Once the dust settles and the economy is on firmer grounds, we may close 2024 with an unemployment rate close to 4%, lower interest rates, and some moderation in prices, all supporting the economy’s growth. By and large, this is not an alarming prospect, which should help medium-term planning.
However, although the future looks better, potential bumps are not spared. Let us not forget that 2024 is an electoral year, and we are part of a world with a reserved diagnosis. The local and global challenges may create greater polarization, and external forces may ultimately impact our economy, threatening our return to calmer economic waters and adjusting our consumption patterns.
In this context, it is critical to see that those managing the economy do not take their eyes off the ultimate goals of growth and stability. In the political arena, let us hope to hear messages that support maintaining stability and growth over short-term political gains. Neither current policy-making nor political needs should risk and diminish the efforts made by citizens in their navigation through the past and their dealing with a new normal.
Rudy Araujo is an instructor at the Columbia College Robert W. Plaster School of Business. He has more than three decades of professional experience as chief executive of an international technical support agency and a high-level public servant. In 2019, Araujo turned his attention to teaching and consulting.