Financing

How will the economy shape up in 2024? That's a great question

Earlier this year, economists—and some big restaurant chain executives—were certain of a recession. Now everybody is certain of a “soft landing.”
Illustration by Marty McCake and Nico Heins

In October 2022, McDonald’s executives warned of a potential mild recession in the U.S., with a worse recession in Europe. They would reiterate that belief a few months later.

“Boy, was I wrong,” CEO Chris Kempczinski said this month at the company’s Investor Day presentation.

Don’t worry, Chris. You’re not the only one. And a lot of your fellow members in the Wrong About a Recession Club have PhDs in economics and get paid by big banks to make such predictions.

Let’s see: Around the same time that Kempczinski made his U.S. recession prediction, Bloomberg Economics said its forecast for a U.S. recession within a year hit 100%. It couldn’t have been exactly 100% because it’s more than a year now and we still haven’t had a recession.

Fitch Ratings at around the same time predicted a recession in the second quarter. Even economists allegedly perfect at predicting recessions were convinced one was on its way.

The reason for the recession predictions was simple: Inflation was at generational highs. The U.S. Federal Reserve raised interest rates aggressively to get it under control. That combination usually leads to recessions, because the higher rates are designed to slow consumer spending and ease rising labor costs that typically drive inflation.

And there were plenty of reasons to be worried about the state of the consumer. They’d spent down their pandemic savings, ran up their credit card bills and believed prices to have risen faster than they actually have.

But consumers had other things to say. The economy continued to add jobs throughout the year, including another 150,000 jobs in November. And when consumers have jobs, they have more money to spend and more reasons to spend it.

Consumers may not have liked the prices they were paying. They may have shifted that spending around here or there—visiting different restaurants or doing so less often, for instance—but they kept spending.

And consumers drive much of the U.S. economy. As such, the economy accelerated in the third quarter. The U.S. GDP rose 5.2% in the third quarter, according to the U.S. Bureau of Economic Analysis. It was the fastest rate of growth since the pandemic recovery-influenced fourth quarter of 2021. By our count that was about one year after everybody said there would be a recession.

Now, the prevailing thought among economists is that the economy is headed for the much-desired “soft landing,” meaning that the Fed managed to accomplish its job of easing inflation without throwing us into that dreaded recession.

Goldman Sachs, for instance, predicts the economy will grow 2.1% in 2024 and puts the odds of a recession over the next year at just 15%, “much lower than commonly appreciated.” It said last month that the economy “is on its final descent to a soft landing.”

“It was fair to wonder last year whether the labor market overheating and an at times unsettling high inflation mindset could be reversed painlessly,” David Mericle, Goldman Sachs Research’s chief U.S. economist, wrote. “But these problems now look largely solved, the conditions for inflation to return to target are in place and the heaviest blows from monetary and fiscal tightening are well behind us.”

To be sure, just because the economy won’t hit a recession doesn’t mean there won’t be pain in certain sectors, and plenty of signs exist for some shifting of traffic or sales in the restaurant industry.

Frustration with high restaurant prices, for instance, has already made traffic more challenging than it’s been in a long time. Fast-food restaurants are losing business to grocers and to convenience stores, largely over high prices.

Indeed, J.P. Morgan noted that the U.S. consumer could “bend, but not break.” It expects consumer spending growth to remain positive in 2024, but not at the rate of growth seen in 2023. Such slower spending would certainly put some chains in a bind.  

Yet the economic picture provides some certainty heading into 2024. Rising interest rates and weaker margins had slowed activity and weakened valuations. But the Fed now appears unlikely to raise interest rates further and could even lower them at some point in 2024.

That could spur more mergers and acquisitions in the space after a slow couple of years. At the very least, there is some more economic certainty than there was a year ago.

All that said, a year ago everybody was predicting a recession and it didn’t happen. Today, the prevailing thought is no recession. So maybe just do your best by your customer and wait and be prepared for anything.

And certainly don’t ask Chris Kempczinski for any predictions. “I’m a little bit leery to make any predictions about next year, because I think we’re continuing to see that the consumer has been very resilient,” he said. “That said … there is pressure with lower-income households. But our focus is all about, how do we continue to drive market share? Over time, that’s been our formula.”

This story is part of Restaurant Business’ look back at 2023. Click here to read our other year-end coverage. 

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