The U.S. economy is doing better than the national mood suggests. What to consider.

Americans are in a bad mood lately. Pessimism is at “extremely high” levels, Gallup reported in mid-October, echoing similar findings from the University of Michigan and other pollsters.

But perceptions don’t quite match reality, at least when it comes to financial, economic and monetary issues. With a month to go, 2023 is shaping up to be a solid year, with a personality closer to Santa Claus than Scrooge.

By the end of 2022, interest rates were rising, inflation was running at an annualized rate of 6.5%, and the stock market had just suffered a 19% decline. Since then, interest rates have largely stabilized, inflation has declined significantly, and stocks are rising again.

An improving economic context

The big economic question late last year was when the recession would start in 2023. That question faded after three quarters of growth in gross domestic product, including a preliminary 4.9% increase for the July-September period.

Earlier pessimism was fueled by an aggressive series of interest rate hikes. As borrowers came under pressure, the Federal Reserve’s policy helped keep inflation in check, with the rate falling by half this year to 3.2% in October. Inflation is now much closer to the Fed’s 2% target than it was in June 2022, when the rate peaked at 9.1%.

This suggests that the next trend will likely be towards lower interest rates, albeit gradually.

“It’s too early to declare victory,” Mary Daly, president and CEO of the Federal Reserve Bank of San Francisco, warned at a conference in Phoenix. “Now that we’ve set our 2 percent (inflation) target, we’re determined to meet it; it’s not credible to move the goalposts halfway there.” But the goalposts are getting closer, with inflation down another half-point since her speech in late September.

New Earnings Growth Trend Could Support Stocks

The stock market has strengthened in recent weeks and, barring a late collapse, is likely to post a solid gain for the year, in contrast to the 19% drop recorded in 2022 by the Standard & Poor’s 500, the third-worst fall in four decades. The increase through November 21, 2021, was nearly 17%, excluding dividends.

There are several factors behind this rebound, and one of them is the expected improvement in corporate profits. Stock prices rise when companies make more money, and that could soon be the case, after three straight quarters of declining profits.

Third-quarter earnings “continue to be better than expected” and are on track to increase for the period, Sheraz Mian, research director at Zacks Investment Research, wrote in a recent report.

For the 468 companies in the S&P 500 that had reported results as of Nov. 20, aggregate earnings rose 1.5% from the third quarter of 2022. That doesn’t sound like much, but it could mark the resumption of another long upward trend.

Stocks and your 401(k) could rise Now that the Fed’s rate hikes appear to be over, history shows

Federal debt outlook is bright

Even the federal debt situation, of all things, might provide reasons for modest optimism.

To be sure, Congress is considering another year-end tax plan that would add to the debt, such as expanding the child tax credit and restoring or extending several corporate tax breaks. That plan could add an additional $800 billion to the debt by 2033, the Committee for a Responsible Federal Budget estimates.

““With interest rates soaring and debt near record levels, is Congress really considering more tax cuts?” Maya MacGuineas, the group’s president, asked in a recent statement. “Can politicians really not help themselves?”

Nevertheless, Congress has made progress in passing legislation to bring the federal debt under control.

Deficit totals continue to rise, but “legislative and executive actions taken this year have reduced the projected debt by $1.3 trillion over the next decade, compared with what it otherwise would have been,” the Committee for a Responsible Federal Budget reported. The group attributes this improvement primarily to passage of the bipartisan Fiscal Responsibility Act.

With debt now at about $33 trillion, give or take a few hundred billion, there is still a long way to go. And as politicians enter an election year where many are promising the moon, the fiscal situation could get worse before it gets better. But as things stand, it is a start.

Clearly, the economic and financial climate is not entirely reassuring. Personal debt levels remain high, many Americans are living paycheck to paycheck, small businesses are feeling the pinch more than large corporations, and Social Security finances are still pointing in the wrong direction—to name just a few concerns.

But if the economy continues to avoid a recession and interest rates begin to fall while inflation remains under control, then Americans will have reason to be a little more optimistic in 2024.

Contact the author at [email protected].

This article was originally published on Arizona Republic: U.S. economy, stock market show signs of life at year-end