Weekly Economic Trends and Indicators

This week we look back at the economic and business news of 2023 both locally and nationally. Certainly, one of the most significant stories of 2023 was what didn’t happen. There was not a recession last year even as many analysts expected one.

One year ago, job growth was still very robust and the unemployment rate was still falling. Inflation over the previous 12 months (2022) was around 7 percent, and interest rate increases were a foregone conclusion at every Federal Reserve meeting. The standard script said that the aggressive rate hikes by the Fed were almost sure to cause a recession.

Today, job growth has moderated, and the unemployment rate has stabilized slightly above where it was at the start of last year. Twelve-month CPI inflation stands at 3.1 percent (November), and most people believe that the next move the Fed makes will be to cut interest rates. Through it all, economic growth has remained strong. The standard script was wrong.

This could not have happened without very strong economic fundamentals. As supply chain issues caused by the pandemic subsided, productivity growth resumed, and the supply side of the economy strengthened. Ultimately, the only way to achieve strong economic growth without inflation is growth of the productive capacity of the economy. The events of the last year testify to the strength of that productive capacity.

What does this mean for the Quad Cities economy? Regional economies tend to move with the overall U.S. economy, but may grow faster or slower over both the short and long-run due to different characteristics of the region. Compared to the overall U.S. economy, the Quad Cities is more heavily concentrated in manufacturing and in exports.

As a result, the Quad Cities economy will grow faster than the overall U.S. economy when conditions are especially good for manufacturing and exports, and vice-versa. Over the course of the last year, this column has detailed how two key indicators have created some economic headwinds for regions like ours: interest rates and the strength of the U.S. dollar.

Growth in demand for many types of manufactured goods slows during periods of rising interest rates. From the Fed’s perspective, that is the desired effect as they try to slow down a hot economy and bring down inflation. Furthermore, if rates rise relative to other interest rates around the world, it attracts foreign investment which increases the value of the dollar. We have seen this before in the Quad Cities region. For example, a long series of interest rate increases in 2004 led to regional GDP growth lagging behind the national growth rate in 2005.

Throughout the past year, manufacturing job growth has slowed, indicating that 2023 regional growth may turn out to be slower than the national growth rate. On the bright side, the reverse is also true, and when rates come back down, manufacturing would be expected to rebound and contribute to a better growth than the national average. Given that interest rates are expected to come down this year, that would bode well for local economic growth.

Next week: December U.S. employment report